#TaxmannPPT | Understanding Depreciation as per the Companies Act & ITA

Understanding Depreciation

CA Ankur Agrawal

Agenda

• Meaning of Depreciation

• Reasons for charging depreciation

• Depreciation as per IT & its accounting

• Depreciation as per Companies Act & its Accounting

• Deferred Tax calculation

Meaning

• Depreciation is the permanent and continuous decrease in the book value of a depreciable fixed asset due to use, effluxion of time, obsolescence, expiration of legal rights or any other cause.

Reasons for charging depreciation

To ascertain True Financial Performance & Financial Position

To comply with Legal Requirements

To accumulate Funds for Replacement of Assets

Depreciation as per Income Tax Act

• Condition

o Charged on Capital Assets

o Block of Assets

o Owned by the Assessee and used for business purpose only

o WDV Method of charging Depreciation

o No depreciation in year of sale

Accounting method as per IT

Depreciation is charged to asset Journal Entry

Depreciation A/c Dr.

• To Asset A/c

Depreciation as per Companies Act

• No Specific rates

• SLM, WDV & UOP Method allowed

• Depreciation based on useful Life

• Useful Life given in schedule II

• Residual Value not exceeding 5%

• Justification is required if there is variation in useful life and residual value

Method of Accounting

Provision for depreciation is created

Depreciation A/c Dr. To Provision for depreciation A/c

Inputs Required for calculation of depreciation

Original cost Date of Purchase Particulars of asset Residual Value Double shift or triple shift (only for few Assets)

Deferred Tax on Deprecitation

How to calculate??

Deferred tax Asset

When Depreciation as per IT Act is LESS than Depreciation as per Companies Act, It will result in Deferred tax Asset.

Journal Entry

Deferred Tax Asset A/c Dr.

• To P&L A/c

Deferred tax Liability

When Depreciation as per IT Act is MORE than Depreciation as per Companies Act, It will result in

Deferred tax Liability.

Journal Entry

P&L A/c Dr

• To Deferred Tax Liability

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