Charging depreciation

This query is : Resolved

CA Prabhat Kumar Makhija (Querist)
Follow

24 September 2012 a firm has not been charged depreciation in p/l a/c, though it has been charged as per income tax in earlier years now it want to charge it again. so whether it shall charge on book value of current year or on value which would have been if depreciation is charged in earlier years.

CS, Deepak Pratap Singh

CS, Deepak Pratap Singh (Expert)
Follow

24 September 2012 Dear Friend, as per rules it is presumed that party has claimed depreciation in previous years , whether it is shown in his accounts or not. You have to calculate the depreciation on present WDV. Thanks

CA Prabhat Kumar Makhija

CA Prabhat Kumar Makhija (Querist)
Follow

26 September 2012 thank you sir for your valuable suggestion.
it mean sir if i have a asset whose book value is Rs. 5,00,000, but if i had charged depreciation on it in earlier years it value would be Rs. 1,00,000. So whether i have to charge depreciation on 1,00,000 or 5,00,000.

please reply sir.

Upgrade to CAclubindia Pro. Subscribe Now!

Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
Follow

19 July 2024 When a firm decides to start charging depreciation in its profit and loss account after not doing so in earlier years, it needs to determine the correct base on which depreciation should be calculated. Here’s how you can approach this:

### Basis for Charging Depreciation

1. **Book Value Consideration:**
- The depreciation should be charged on the current book value of the asset as per the books of accounts. In your example, if the current book value of the asset is Rs. 5,00,000, then depreciation should be calculated on this amount.

2. **Reconciliation with Income Tax Depreciation:**
- Even though income tax depreciation might have been charged in earlier years, the firm’s financial statements (profit and loss account) should reflect the depreciation expense based on the carrying amount of the asset in the books of accounts.

3. **Adjustment for Past Non-Charging:**
- Since depreciation was not charged in previous years, the accumulated depreciation should not be adjusted retrospectively in the current year. The current year’s depreciation should be based on the current book value of the asset.

### Example Calculation

- **Asset Book Value:** Rs. 5,00,000
- **Expected Useful Life:** Based on the company's policy (e.g., 10 years)
- **Depreciation Rate:** As per the company’s depreciation policy (e.g., 10% per annum)

**Annual Depreciation Calculation:**
- Annual Depreciation = (Book Value of Asset / Useful Life)

- Assuming straight-line method:
- Annual Depreciation = Rs. 5,00,000 / 10 years = Rs. 50,000 per year

### Conclusion

Therefore, when the firm starts charging depreciation in its profit and loss account after not doing so in previous years, it should calculate depreciation based on the current book value of the asset. This approach ensures that the financial statements accurately reflect the current financial position and operating results of the firm.

If there are specific tax implications or regulatory requirements related to past non-charging of depreciation, it’s advisable to consult with a tax advisor or accountant to ensure compliance and proper treatment of depreciation in both financial and tax reporting.