Do you love that new car smell? Who doesn’t? You reach all exited to your car dealer, have some “Pooja”, take your car keys and drive it off the parking lot of the dealership with a big whiff of that lovely new car aroma! Bang!
No, you didn’t meet with an accident but value of your car just fell by 10 to 15%. By the time your car completes its first year; its value drops another 10% or so. This is the kind of depreciation we see on regular basis. Depreciation is not new to the value of cars. Just about everything suffers from depreciation, specially your business assets.
What is Depreciation?
As illustrated above, depreciation is the loss of value of your assets over a period of time. For accounting purposes, depreciation is the process by which businesses record the reduction in value of its assets over a period of time.
Asset depreciation occurs much in the same way as the car depreciation explained above, having big impact on your profitability and taxes. Assets such as factory machinery, office furniture, vehicles etc wears down over a period of time. Value of assets like software may see fast reduction in its value due to rapid pace of development in that sector. This results in reduction in value of assets of a business over a period of time.
Depreciation of asset is simple fact of life and the Government also sees it that way as well. This means that you can write off value of your assets over the time as the depreciation takes place. This is useful for reflecting true value of your assets in your balance sheet and also reduces your tax liability by claiming depreciation as your business expense. Depreciation calculation for tax purposes has specific rules set under the Income Tax Act and the Companies Act, dictating when and how much of the value of an asset should be deducted.
How to calculate Depreciation
There are various methods of depreciation calculation, however Written Down Value (WDV) method is the most prevailing in India. The specific value of a depreciated asset can be calculated by taking useful life of an asset, scrap value at the end of period and written down value at present. The formula to calculate depreciation at WDV method is R=1 – [s/c]1/n , where R is rate of depreciation, S is residual or scrap value at the end of the period, C is written down value at present and n is useful life of the asset.
If you do not feel like spending several days with your eyeballs stapled open while you try to read the Income Tax and Companies Act, give Ofin a call and we can guide you through the process of depreciation calculation or takeover your accounts. Contact us today to know more.