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Saket Sambhav
•

ADJUVA LEGAL® • 4m

DBA Lessons for Founders - TOPIC 3 Types of Adjusting Entries - Depreciation (A Special Way of Converting Assets to Expenses) You're still running Tech Solutions India. 🚀 What is Depreciation? 🤔 Think about your big-ticket items that last for years - servers, office furniture, or vehicles. These are your "Fixed Assets." 🖥️ They don't last forever; they slowly wear out or become obsolete. Depreciation is the accounting process of spreading the cost of an asset over all the years it helps your business make money. It's NOT about an asset's resale value in the market. 🚫 It's about matching the asset's cost to the revenue it helps generate each period. This is a core concept called the "Matching Principle." Example: Server Equipment 🖥️ You buy new servers for ₹6,00,000 with an expected useful life of 5 years (60 months). Using the simple "straight-line" method: Monthly Depreciation = ₹6,00,000 / 60 months = ₹10,000 per month. At the end of each month, you make this adjusting entry: Debit: Depreciation Expense - ₹10,000 (This is this month's "used up" cost. It goes on your Income Statement.) Credit: Accumulated Depreciation - ₹10,000 (This is a special "contra-asset" account. It's a running total of the asset's wear and tear.) How it Looks on Your Balance Sheet: The "Accumulated Depreciation" account sits right under the asset, reducing its value on your books. After one month, it looks like this: Server Equipment (Original Cost) : ₹6,00,000 Less: Accumulated Depreciation : (₹10,000) Book Value of Server Equipment: ₹5,90,000 📉 This "Book Value" is the asset's remaining value for accounting purposes. Important Exception: Land is never depreciated! It doesn't get 'used up'. 🏞️ Why does this matter? Depreciation ensures your monthly Income Statement is accurate by including the cost of using your long-term assets. It also gives a true picture of your assets' book value on the Balance Sheet. It's crucial for understanding your real profitability! ✨ Pic credit - Patriot Software

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Replies (4)

Tarun Suthar
•

The Institute of Chartered Accountants of India • 4m

Let me summarise this 😊 Depreciation refers to the wear and tear of tangible fixed assets, such as machinery and buildings (excluding land). Each year, you can deduct a fixed amount or a percentage of these assets until their value reaches zero at the end of their useful life. ( You can choose any of the SLM or WDV methods to record Depreciation) Similarly, amortisation applies to intangible assets, like software and servers. Depreciation is important for providing an accurate financial position of the company in any given financial year. If we were to deduct all depreciation in one year, it would lead to misleading profits or losses in the financial statements, so its divided into useful life age of an asset.

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Vishu Bheda
•

Medial • 4m

keep posting more amazing stuff like this one..

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