In today's clip, friends, a very important adjustment,
which troubles 11th grade students, troubles 12th grade
students, even troubles graduation students, and in
professional courses too, somewhere, it troubles them when
they join professional courses.
And this is the easiest adjustment, but I don't know why
there is a misconception about it,
I don't know why things are not clear about them, and I
don't know why children have a problem with it.
We will discuss this adjustment from A to Z, we will
understand its meaning, we will look at its general
entries, we will look at its effect on the financial
statement, and you will find that this is not difficult,
yes, I don't know why we used to make it difficult. The
name of that adjustment is Depreciation.
The name of that adjustment is Depreciation, friends.
D E P R E C I A T I O N, Depreciation.
I will have to go to the pad, I will have to go to the pad.
Everyone keep writing with me, Depreciation.
See friends, what is this?
First, if someone has started explaining the meaning of
direct depreciation to you, or someone has already learnt
that depreciation means a fall in the value of an asset,
then for their information, I would like to tell you that
you have an infinite amount of information.
You are living with a lot of incomplete information, very
bad, very very bad.
It has a very detailed meaning, let me try to explain it to
you.
Friends, there is a concept of accounts, what is its name?
Matching concept.
Its name is Matching concept.
Matching concept says that if you are doing accounting for
a year, we generally do accounting for a year, either we do
it from 1st January to 31st December or from 1st April to
31st March.
So matching concept says that whichever year you are doing
accounting, whichever year you are doing accounting, so if
you have to take out the profit of that year, if you have
to take out the profit of that year, then you have to take
related income from that year, that which was the related
income of that year, and you have to minus the related
expenses of that year, then you will get the profit of that
particular year.
For example, we are doing accounting for financial year
2021-22.
For example, we are doing accounting for financial year
2021-22.
So if you have to take out the profit of 2021-22, then you
will take the income related to 2021-22, and you will minus
the expenses related to 2021-22, then only you will get the
profit of 2021-22.
Am I right or wrong?
You are right, sir.
Okay.
Now, friends, what happens in 2021-22?
We have spent some money.
I will tell you the names of those expenses one by one.
We paid the rent from 1st April 2021 to 31st March 2022.
What did you pay?
You paid the rent.
We paid the salary from 1st April 2021 to 31st March 2022.
What did you pay?
You paid the salary.
You paid the insurance premium from 1st April 2021 to 31st
March 2022.
What did you pay?
You paid the insurance premium.
You have paid the electricity bill from 1st April 2021 to
31st March 2022.
You have paid the electricity bill.
And friends, you can see that all these expenses are
related to which year?
They are related to 2021-22.
So, when this will become the P&L of 2021-22, all these
expenses will go to the debit side.
Rent, Salary, Insurance premium, Electricity bill, etc.
If there is any outstanding, prepaid or advance in these,
how do they adjust, you have learned that.
Okay? So, these will go there.
Now, what is one more expense?
In 2021-22, friends, one more expense was done by our
business.
What was that expense?
I bought machinery for 10 lakhs.
How much did I buy machinery for?
For 10 lakhs.
Tell me in simple words.
Now, if you have read the accounts, don't tell me that
machinery is an asset.
Machinery is an asset.
Don't say such childish things to me now.
Now, you think from the heart of a common man, who doesn't
know anything about accounting.
For a common man, buying a machine and paying 10 lakhs,
does he have an expense on his pocket or not?
You are saying machinery is an asset in the language of
accounts.
Okay.
But how can you deny that it is also an expense?
You can't do it.
It is an expense.
Think from the heart.
Your teachers or wherever you have studied, they have fed
in your mind that machinery is not an expense but an asset.
How is it possible?
It is an expense.
We are paying.
We are not paying today.
We will pay tomorrow.
It is an expense.
We have to pay.
This is an expense.
Anyhow.
The amount is high.
In fact, it is a big expense.
What is it?
It is a big expense.
What we say in the local language, it is a big expense.
It is a big expense.
But, there is a big specialty of big expenses.
What? It runs for a long time.
Right? So, the life of the machinery you have bought is 5
years.
How much is it?
It is 5 years.
How much is the life?
It is 5 years.
So, this expense of 10 lakhs, when did you pay for it?
In 2021-22.
But, in return, you will use the machinery for 5 years.
In 2021-22, in 2022-23, in 2023-24, in 2024-25, and in
2025-26.
In 2025-26.
Do you agree with me?
Yes or no?
So, we can say that this expense of 10 lakhs, we have paid
for 5 years.
By paying 10 lakhs, we have become free for 5 years from
the machinery.
Tell me, Mr.
Kajal, am I right?
We have paid 10 lakhs, now we will sit and enjoy for 5
years and run the machinery.
So, how much benefit will this expense of 10 lakhs give us
for 5 years? 5 years.
In return of this expense of 10 lakhs, how long will we run
the machinery for?
For 5 years.
After running the machinery for 5 years, how long will we
make goods from the machinery and sell them?
For 5 years.
After running the machinery for 5 years, after making and
selling goods from it for 5 years, how much profit will we
earn?
For 5 years.
So, the profit of this expense of 10 lakhs will be received
for 5 years.
How long will you get the benefit of spending Rs 10 lakhs?
For 5 years
You buy a car for Rs 10 lakhs
In return, you drive a diesel for 10 years You go here and
there, do business, take profit from it, take benefit from
it
And if you do petrol, then for 15 years
So, if you buy a car today for Rs 10 lakhs in financial
year 2021 Will you say that this is the entire expenditure
of 2021?
No, you have spent this entire expenditure for 10 years
Spent for 10 years and for 15 years
Similarly, here you have spent Rs 10 lakhs for 5 years
And what does the matching concept say?
If you want to make a P&L for 2021-22
If you want to know the profit of 2021-22
Then you will have to take the expenditure related to
2021-22
So, if this expenditure of Rs 10 lakhs has been done for 5
years
In return, you will get the benefit for 5 years
So, how much will be the expenditure for 1 year?
Rs 10 lakhs divided by 5 means Rs 2 lakhs
Means Rs 2 lakhs
Sir, then where will we show the remaining Rs 8 lakhs?
The remaining expenditure of Rs 8 lakhs
The P&L for next year will be of Rs 22-23
Then the P&L for next year will be of Rs 23-24
Then the P&L for next year will be of Rs 24-25
And then the P&L for next year will be of Rs 25-26
In those, we will show Rs 2 lakhs, Rs 2 lakhs, Rs 2 lakhs,
Rs 2 lakhs
That is, even if we have made the payment in 2021-22
In return for buying the machinery, the entire Rs 10 lakhs
Even then, we will not record that Rs 10 lakhs in the P&L
of 2021-22 Because in return, you will get the benefit for
5 years
This expenditure of Rs 10 lakhs is related to 5 years
We have spent Rs 10 lakhs because We will be relaxed for
the next 5 years
So the next 5 years are related expenses
That's why Rs 2 lakhs will go in the P&L of 5 years
Not in the P&L of 1 year
And who says this?
This is called a matching concept
That brother, take the expenses related to 1 year
If you want to know the profit of 1 year
What were all these expenses?
Rent, salary, insurance premium, electricity bill
You were making a payment of 12 months And in return, you
were getting the benefit of 12 months
Do you understand?
So this was going in the P&L of the same year
This is not related to the next year
You have paid the rent of 2021-22
In return, will you get the shop for free for the next 4
years?
No, right?
You will not get it in a day
So all the expenses of this rent are related to 2021-22
So where will all go?
Will go in the P&L of 2021-22 All of it
Similarly, the salary, insurance premium, electricity bill
But, we spent 5 years for machinery
If machinery would have run for 1 year of 10 lakhs
Then we would have written 10 lakhs in P&L of this year
Because it was related to 1 year
But it will run for 5 years
So in P&L we will write 2 lakhs 2 lakhs 2 lakhs 2 lakhs
And we will divide it
And what we will write after 2 lakhs
To Machinery
Done friends
If you understand the thing then tell me honestly
Feeling it
Now we will talk further
If you understand till here then we will talk further
Friends, it is like this
Now you have written here 5 times
To Machinery
If any unknown person will see
Then he will feel that in 5 years 5 machineries of 2 lakhs
were purchased
Who does not have knowledge about this
So there should be a special name for this
It should not look like
Machinery of 2 lakhs is being purchased 5 times
It should be known that
Machinery of 10 lakhs has been purchased once
That is being distributed in 5 years by dividing it by 2
lakhs
It should be known
A name has been given for this
And what is that name
Depreciation Very very good
What is that name
Depreciation To Depreciation
To Depreciation
Means any fixed asset
Machinery If you have spent
Which will give you more than a year
Then the cost you have is 10 lakhs
We divide its life in 5 years
By dividing it by 2 lakhs
And transfer it to P&L
This process is called Depreciation
Any expense
Whose benefit will be more than a year
The cost of that expense
Divide that cost in those years
How many years will benefit
Divide it and send it to P&L
This process is called depreciation
This is the meaning of depreciation
Now, ignore the general entry aspect
Let's move to general entry aspect
Can you people tell me
For example, tell me, if we buy machinery, we will face
depreciation?
If we buy machinery, then only we will distribute its cost
annually.
So first tell me the entry to buy machinery.
Entry to buy machinery.
Machinery account debit to bank.
If you buy cash, if you buy loan, then creditor will come.
How much money? 10 lakhs, 10 lakhs.
Now start writing quickly.
Machinery to bank.
How much we have debited? 10 lakhs.
But sir, how much do we have to transfer in P&L?
From this, how much do we have to transfer in P&L?
You have seen, how much do we have to transfer in this
year's P&L? 2 lakhs.
How much do we have to transfer? 2 lakhs.
It was written in P&L account, here debit side to machinery.
So from this expenditure, from this expenditure of 10
lakhs, how much do you have to transfer in P&L?
P&L to machinery, how much money? 2 lakhs.
P&L to machinery, 2 lakhs.
Where do we have to transfer the expenditure?
In P&L account.
Am I saying right, Gajal? Am I saying wrong?
Are you saying right, sir?
So this expenditure, we have booked for 10 lakhs.
We have shown expenditure of 10 lakhs.
Because we have to show how much we have spent in this year.
And then, how much do we have to transfer in this year's
P&L?
Only 2 lakhs.
And this work is done in two parts.
This entry, P&L account, debit to machinery, 2 lakhs, 2
lakhs.
From this entry, it seems that we have bought 2 lakhs of
machinery in 5 times.
That's why we do this work in two parts.
First, we write depreciation account, debit to machinery.
Write depreciation account, debit to machinery, 2 lakhs, 2
lakhs.
And then, we write one more entry.
P&L account, debit to depreciation, 2 lakhs, 2 lakhs.
Can you see?
First write, then I will explain.
Just check it now.
Sir, we have done depreciation once.
Devesh, Deepak, Kajal, Rajat.
Then, we have done depreciation once.
Then, we have done credit.
So, this is the effect of debit and credit.
What is the remaining entry?
P&L debit to machinery.
Which was written above.
Let's just divide it into two parts.
So that it is known.
By dividing 10 lakhs, we are writing 2 lakhs in 5 years.
Give its name once.
Depreciation.
That's why.
Give its name once.
Depreciation.
That's why, friends.
Okay? Okay.
Now, what is the entry of our depreciation?
Anyone will ask.
This is the entry of depreciation.
Depreciation to machinery and P&L to depreciation.
There is another thing called provision.
We will see that later.
When we are doing the entire chapter of depreciation.
You can tell.
So, from these entries, your financial statements.
What will be the effect on P&L and balance sheet?
Mr. Kajal, you have already seen in P&L.
I was explaining just now.
Debit side will come.
2 depreciation, 2 lakhs.
You have already seen P&L.
And what will be the effect of depreciation on my balance
sheet?
In my balance sheet, I recorded asset side machinery.
How much did I buy? 10 lakhs.
From that, I will minus how much depreciation.
2 lakhs.
And how much will be left outside?
It will be only 8 lakhs.
Only 8 lakhs.
This will be the effect.
Note this.
If anything is left here, write it here.
According to me.
All the time we have spent here.
It's been 18 minutes.
And you understood the real meaning of such an important
thing like depreciation.
Real meaning.
What is depreciation?
It means a large expense.
Which is more than a year.
So, the price we have paid for that expense.
10 lakhs.
We will divide it in the same year's P&L.
Because the matching concept says this.
If the expense will be beneficial for 5 years.
It means you have paid for 5 years.
It means the expense is of 5 years.
It means it will go in the P&L of 5 years.
2 lakhs.
Okay? Okay, sir.
Its general entry.
This should happen.
Machinery to buy.
Machinery to bank.
And then we will put the expense in P&L.
2 lakhs.
So, P&L to machinery.
But.
Let's make 2 pieces of the P&L to machinery entry.
How? Tell me quickly.
How?
How can this happen?
I have spent 20 minutes.
How can you say depreciation to bank?
First depreciation account.
Debit to machinery.
Right? And after that.
P&L account.
Debit to depreciation.
Its effect is this.
Debt was created once.
What is left?
P&L to machinery.
Let's do it in 2 pieces.
So that we know.
What do we know?
Tell me.
That.
We are dividing the same expense.
In many years P&L.
Not that we are buying 2 lakhs of machinery again and again.
What will be the effect of this?
On financial statements.
Debit side will go in P&L account.
Depreciation 2 lakhs.
And in my balance sheet.
From the asset named machinery.
Minus.
This is the effect of depreciation.
Will meet in the next clip.
Thank you.
Bye.
Thank you.