What are provisions of law about Depreciation?

Depreciation

Section 205 (2) lays down how depreciation should be calculated.

The Section lays down that depreciation should be provided to the extent specified by Section 350 i.e. at the rates specified in Schedule XIV or in respect of each item of depreciable assets for such an amount as is arrived at by dividing 95% of the original cost thereof to the company by specified period of such asset or any other basis approved by the Central Government.

If any asset is sold, discarded, demolished or destroyed for any reason before depreciation of such asset has been provided for in full, the excess if any of WDV of such asset over its sale proceeds shall be written off in the financial year in which the asset is sold or discarded or demolished.

The amount of depreciation charged every year is debited to Profit & Loss Account and credited to Provision for Depreciation Account which is allowed to accumulate year after year. The balance on provision for Depreciation Account is deducted from the cost of the fixed asset.

If any asset is purchased during an accounting period, depreciation may be provided for full year giving a note to that effect. But strictly as per the accounting principle, depreciation should be provided for the period for which the asset is put to use. If depreciation is provided for any previous year, it should be treated as an appropriation of profit.

The law does not make it compulsory for a company to provide for depreciation on fixed assets. However, it provides that dividend cannot be declared without providing for depreciation.

Note : In case of vertical Balance Sheet, a separate schedule of fixed assets is prepared. The details of fixed assets and depreciation should be recorded in the appropriate columns and the Net Block is shown in Balance Sheet.