Hello, what have you brought sir today? I have brought the
discussion ahead, are you ready?
Yes sir, we will do it together. I said very, very, very,
very, very, very good.
Okay, it will start today. From where? We have read the
meaning of depreciation.
And related terms, when did you read this sir? Related
terms have become this.
Net cost, PPE, useful life, which went along with the
explanation.
So this topic has been completed, you must be feeling like
this.
Oh my God, sir, the meaning of depreciation has also
happened and we have also learned the related words.
Net cost, PPE, useful life, now what is left sir? What is
left sir?
Shall I tell you what is left? Friends, we learned net cost.
Now you have to know some more advanced things related to
net cost.
Oh, okay sir, okay, then it will end.
Meaning of depreciation learned, learned the meaning of
PPE, learned the meaning of useful life,
Learned the meaning of net cost, a little more related to
it.
Then we will move on to the next topic.
The second topic is straight line method and written down
value method.
Then we will move on to that topic.
Say how was it? Sir, it was very good, I said okay.
Some more things related to net cost.
Examples of directly attributable cost.
Example of directly attributable cost.
Look friends, I taught you to add one thing while
calculating the net cost.
Which sir?
Add, see this, directly attributable cost to bring PPE to
its present location and condition.
Directly attributable cost to bring PPE to its present
location and condition.
The cost that is directly related to it will be added to
the cost of PPE.
Whatever expense has been done to bring PPE to its present
location and condition.
That part of the net cost of PPE will be made, it will be
made, it will be made.
No one is going to stop far and wide.
I am going to give you some examples of it now.
While explaining the thing, I gave only one example,
freight.
That we bought machinery, picked it up from the supplier
and brought it to our go down,
Means to the present location.
And the expense of freight that we paid in this will be
added to the cost of PPE.
But this is not the only example of directly attributable
cost.
Freight, there are other examples.
Any expense that will be done to PPE in its present
location and condition.
That PPE will be made.
Look at some examples of it, my dear friends.
Look at some examples of it.
Professional fees.
Why is this?
My dear friends.
This is because.
For example, you did not know the know-how of that asset
that you bought.
How to run it.
For that, you gave money to a professional and learned to
run it.
That will also be part of the cost of PPE.
You bought PPE.
That's why you learned to run it.
Directly attributable cost means this too.
The present location and condition is there.
And along with that, the cost directly related to PPE.
That will also be added to its net cost.
This means this too.
You bought an asset.
Now I am calling PPE an asset.
PPE has another name.
Fixed asset.
Tangible.
PPE has another name.
Fixed asset.
Tangible.
That is, tangible fixed assets.
Okay, sir.
Should I call it PPE or tangible fixed assets?
It's the same thing.
You bought a PPE or a tangible fixed asset.
You don't know how to run it.
You appointed a professional.
You gave him some money.
You gave him the fees.
And then you learned to operate and run that PPE.
So that professional fee is directly attributable cost.
It will be part of the net cost.
Sir, where will all these things come in handy practically?
Tell me this.
Will all these things come in handy practically in your
office?
Where else will they come to you?
For example, this case is made with you.
That your boss bought a PPE.
The office in which you work.
And he paid some professional fees.
Now what will you do?
You will sit to charge that professional fee in P&L.
You will say professional fees.
So the boss's expenses are done.
And debit all expenses.
You will create an account in teleprime.
Professional expenses under the heading of indirect
expenses.
And you will charge it all there.
But your accounting rules say something else.
Your net cost provision says that professional fees.
It will not go in full P&L.
It will also be attached to the net cost.
As soon as something is attached to the net cost.
Then it does not go in the same year's P&L.
It is then divided into many years of P&L.
Yesterday we did the same.
What is the meaning of adaption?
The net cost of PPE is distributed in its life.
So if you charge professional fees today.
Then today it will go on the shoulder of this current
year's P&L.
Full professional fees.
Which should not happen.
Professional fees will also be added to the cost of PPE.
Will be divided in 5 years.
Because you have given this professional fee for 5 years.
Think a little.
This professional fee that you have learned to drive an
asset.
Learned once.
You have to leave it again and again.
Learned to drive a car once.
Learned to leave it again and again.
After that it is impossible to unlearn it.
Learned once like this.
So learn to drive a machine once like this.
Then you can't forget.
Yes sir.
Can't forget.
Absolutely right.
So you will drive it for 5 years.
After learning it once.
And after driving it for 5 years.
You will produce goods.
And you will earn a lot of money by selling goods.
So this will also be allocated in 5 years.
Professional fees will also be added to the cost.
Trial run cost of net trial proceeds.
Trial run cost.
Net of trial run proceeds.
Trial run cost.
You bought PPE.
You drove it on the basis of trial.
Like you bought an oil rig.
Yes sir.
Now oil rig is such a big machine.
That it is not right to start the whole work directly from
it.
Let's drive it by trial first.
So we did trial run.
We spent 10,000 on trial run.
Okay.
Let's start it once and see.
Cost of 10,000 rupees.
So that will also come in the cost of your PPE.
As long as PPE does not reach in such a condition.
In workable condition.
As long as we are trying to drive it.
Till then the expenses will be added to the cost of PPE.
Yes.
If you drove that PPE.
You drove that oil rig.
In which you spent 10,000 to drive.
From there that PPE, that oil rig did a good job.
And it removed a little oil.
And we were happy.
Very good.
This is going very well.
And we sold that oil for 4,000 rupees.
So the 6,000 that are left.
That will be added to the cost of PPE.
You spent 10,000 to run the trial.
And the oil that came from it.
Recovered 4,000 from there.
Trial run proceeds mean.
While trying.
The goods that touched.
Selling it.
The money that touched.
They are called trial run proceeds.
So that will be minus.
The cost of 6,000 will be added to your net cost.
Installation and assembly cost.
The cost of installing or assembling.
Delivery charges.
You can also take freight for the same delivery charges.
The charges of bringing from one place to another.
Cost of site preparation.
Tell me sir, give an example of this.
Look friend.
Build a building.
You have to build a building.
Not Lakshmi Chit Fund.
You have to make a good one.
We don't have to run all night.
We have to make a good building.
What is needed to make a building?
Sir, we have cement.
And the machine to put the lantern.
And sir, there are other equipments.
All of them have to be kept in one place.
And then we keep building.
So to keep all of them in one place.
We made a site.
Put shade.
Put teams etc.
And put it under it.
Because it was raining a lot in that area.
It was raining a lot in that area.
My dear friends.
Okay sir, this is the thing.
Yes, it was raining a lot in that area.
We are making a building in that area.
So what did we do?
We made shades.
We made teams.
So the cost of making the team.
Will be considered as a part of the cost of the building.
Because to make a building.
We have to make shades.
Neither do we make a building nor do we make shades.
So the cost of putting shades in the cost of the building.
The expense of putting the team will be added.
Okay sir.
And cost of employee benefits.
Cost of employee benefits.
This will also come in your directly attributable cost.
Okay.
You bought a PPE or a machine.
And the employee who is going to operate it here.
Who is going to run that PPE.
He doesn't know how to use it.
You got him training from somewhere else.
There is an expense of 5000 in training.
To train him.
That will also be a part of the cost of your PPE.
To run PPE.
You are getting training to the employee.
It will be added to the cost of PPE.
Directly attributable cost.
Okay.
So remember.
If this is happening in your office.
Bought a machine.
Employee will get training to run it.
So don't put the training expense in P&L.
Add it to the cost of that PPE.
Add it to the cost of that tangible fixed asset.
Take it there.
Then it will be distributed in P&L.
In the name of depreciation.
In the coming years.
Whatever life will be of that PPE.
In those years.
Okay sir.
Okay.
No problem.
We understand this.
So we made a mnemonic code of this.
That which things will be directly attributable cost.
And will be added to that.
In the cost of PPE.
This is your S.T.I.P.E.N.D.
Stipend.
Do you know the meaning of stipend?
Hard work.
In exchange of doing work somewhere.
In exchange of doing articleship or training somewhere.
The little money you get.
It is called stipend.
Like take CA course.
In CA course.
After clearing the intermediate stage.
Children have to go to the CA office.
And have to do training.
Have to do articleship.
In a CA firm.
Okay.
So they get a little expense from there.
Which is called stipend.
But.
Here what is S for?
Here stipend is different.
This is your S for.
Cost of site preparation.
What is T for?
Trial run cost.
Net of trial run proceeds.
What is I for?
Installation and assembly cost.
What is P for?
P for professional fees.
What is E for?
Cost of training.
Cost of Employee Benefits
What is N? 1,2,3,4,5,6 1,2,3,4,5,6 What is N?
D is for Delivery Charges
N is for Stipend
Ok After this, we will see
Cost of inaudible inaudible inaudible inaudible inaudible
inaudible inaudible inaudible inaudible inaudible inaudible
inaudible cost of inaudible cost of inaudible
We spent it on inauguration
We inaugurated it, kept a party, ordered samosas and pepsi
called 4 people, made them sit, showed them the office, did
a little bit of airing lifted the collar from behind and
there will be an advertisement as well
So should we add it to the cost of the machinery that we
have bought to make the goods? No sir
This is a separate advertisement type of expenditure
This will go into the P&L
Whether it is an inauguration cost or an advertisement
promotional cost
It will all go into the P&L
Shifting cost
One machinery has been kept here for 3-4 years
Now you need it at another factory
You took it there
You spent Rs.
3000 to keep it there
Will you add it to the cost of PP? No
No, we will not add it to the cost of PP
Once you have brought PP to your godown you have brought it
to one place the expenses will come to the cost of PP
After that you will keep shifting it
All the expenses will go to the P&L
It will not be added to the cost of PP
Staff training cost
Okay Administration and other general overhead
If there is anything like this then that too my dear
friends will not be a part of the attributable cost
Its anemonic code is
SIA A for Advertisement, S for Shifting
S for Staff Training, I for Inauguration and A for
Administration and other general overhead
Third point
Scrap value is the recoverable portion of cost incurred
when assets remain of no use to the business
It is an estimated amount
Whatever is written, read it out
Yesterday I told you to reduce the scrap value
See this
While calculating the net cost, we reduce the scrap value
Because when we sell this money in the godown
It will be recovered
That's why we don't include it in the cost of PP
Okay It is also known as
Residual value, salvage value, terminal value, fetch value
Scrap value
How much asset is sold in the garbage
There are many other names for it
Residual value, salvage value, terminal value, fetch value
There are many names for it
Okay Okay Now the discussion of net cost is completed
Now the discussion of net cost is completed
Now we will move to our next topic
Straight line and written down value method
What is it and what is not
Let's see
Come on friends
Now I will explain to you
You must have heard this a lot
Whenever depreciation is there
You must have seen it
You must have heard the name of these two words
I can say with challenge
If you are from commerce
If you are from science or arts
Then it is different
If you are from commerce background
Then you must have heard this name
And if you have not heard it
Then you are back bankers
Okay Okay Take this
What is the meaning of depreciation
Any PP Means an item which
Fulfills three conditions
Tangible, touchable, seeable
Used in business
Life is more than 12 months
Any PP which fulfills those three conditions
Means its net cost
That net cost
The life of PPE
Share and charge
Means if the net cost of PPE is 1 lakh
And useful life is 5 years
Then the cost of 1 lakh will be distributed in 5 years
Means in 5 years P&L account
We will write 20,000 20,000 20,000 This is called
depreciation
Distributing the net cost of PPE in its life
Is called depreciation
Distributing in life and transferring in P&L
Is called depreciation
Okay sir
The name of this 20,000 is 2 depreciation 2 depreciation 2
depreciation
No 2 depreciation 20,000 No No No No No No No No No No No
No No
Not Not Not Not
Not Not This formula is called straight line method.
Okay, okay.
Sir, is there any other way to get depreciation?
I will tell you in a while.
Understand what you have learned now.
What have you learned now?
If you divide the net cost by the useful life, then you get
deption.
And this is called the straight line method.
Okay, sir.
Okay, come and see.
Come and see.
Straight line method.
As per this method, depreciation is calculated as net cost
divided by estimated useful life.
Under this method,
the depreciation that comes out, remains same every year.
Its amount is same every year.
You see, how much depreciation is there every year?
Sir, every year it is 20,000.
Every year the amount of depreciation is 20,000.
Yes.
There are some other names of straight line method.
By doing net cost divided by estimated useful life, the
method of getting depreciation is called straight line
method.
Or you can call it original cost method.
You can call it fixed installment method.
You can call it fixed cost method.
Whatever you want to say, you can say.
Also,
there are some other things written here.
We will see this in a while.
There are some other things written here.
Okay, sir.
Okay.
Now listen to the next thing.
Sir, you have taught depreciation.
What else is depreciation?
You have said that divide 1 lakh in 5 years.
It is depreciation.
Yes, but I have not said that if you divide 1 lakh in 5
years, then it should always be equal.
It can also be unequal, friend.
It can also be unequal.
Come on, increase the definition of depreciation again
carefully.
It is written in this.
Depreciation is the allocation of net cost of a PPE over
its useful life.
Allocating net cost in its life is called depreciation.
It is not written that allocation should be equal.
20,000 should reach every year.
It is not written anywhere.
Divide 1 lakh in 5 years.
But it should be 20,000 every year.
It is not written anywhere.
Oh.
It means we can adopt some other way to get depreciation.
Yes.
Depreciation means that the cost will be distributed in its
life.
It will be distributed equally.
It is not written anywhere.
So, sir, why did we need it?
What is wrong if we distribute equally?
Everything is right.
20, 20, 20, 20, 20.
1 lakh went into the P&L of 5 years.
1 lakh was the expense of 5 years.
In 5 years, it was divided into P&L by 20,000.
What is wrong?
What is the problem, sir?
There should be no problem in this.
But there is a small problem in this.
Shall I tell you?
Come, listen.
Now I will make a P&L of 5 years in front of you.
And I will tell you the problem.
1 P&L, 2 P&L, 3 P&L, 4 P&L, 5 P&L.
Here it is.
1, 2, 3, 4, 5 P&L.
What did you write here?
Too depreciation.
20,000.
You understand the meaning of K, right?
Yes, sir, that Ekta Kapoor's K.
You just understand this Ekta Kapoor's K.
I think you watch Daily Soap sitting with your mother.
Sitting with your mother and sister.
You are not The Boys.
You just leave it.
Today you broke my heart.
This is not that K.
This is YouTube's K.
3, 0.
K means 3, 0.
3, 0 after 20 means 20,000.
Sir, we were thinking the same.
Then thumbs up to you.
Okay, sir.
Come.
Friends, do you know what happens now?
There is another expense of repair.
Expense called repair.
There are two expenses related to any PPE.
One is cost.
When we buy it.
And then we have to repair it from time to time.
Then we have to repair it from time to time.
There are two expenses related to any PPE.
One is cost.
And then we have to repair it from time to time.
One is cost.
And then we have to repair it from time to time.
Yes, sir.
We have seen the cost.
Let's say we divide it into 5 years and send it to the P&L,
what will happen to the repair?
Sir, we will charge the same amount in the year in which we
will do the repair.
Repair, the amount you will spend in the year, you will
send it to the P&L in that year.
Debit side, expense side.
Okay sir, okay sir.
So now tell me the answer to my next question.
The expenses called repair,
The expenses called repair, will be less or more in the
initial years?
Sir, when a new thing comes, it runs well in the beginning,
and then it gets a little bit of trouble and needs
repairing.
There is no need for repairing in the beginning, sir.
So in the initial years, the expenses of repair are less.
In the initial years, the expenses of repair are less.
And in the later years,
In the coming years, in the later years, its expenses will
be more.
Repair expenses increase.
So I am saying that in the beginning, there was no expense
of repair in the first year.
In the second year, the expense of repair was Rs. 2000.
In the third year, the expense of repair was Rs. 3000.
In the fourth year, the expense of repair was Rs. 4000.
And in the fifth year, the expense of repair was Rs. 5000.
Whatever it is, it is like this.
I have a laptop in front of me.
I bought a new one.
I didn't ask for any expense at all.
Now I have to do a little repair.
There is a little expense in it every year.
Why are you saying a year?
You have to do a little repair every 3-4-5 months.
It's not much, it's only 2 years old.
It's not much.
I am saying in 2 years, it must have been 1.5 years.
Sir, your laptop is not right.
We will talk about it later.
You come back.
So friends, tell me how much did you spend on depreciation
and repair in the first year?
If you say Rs. 20000 and 0, it is Rs. 20000.
If you say Rs. 20000, it is Rs. 20000.
In the second year, how much is the expense of both
depreciation and repair?
Rs. 22000.
Here the expense is Rs. 20,000.
Total.
Here the expense is Rs. 22000.
Sir, why are you doing the total?
Both expenses are related to PP.
That's why we are doing the total once.
Rs. 23000, Rs. 24000 and Rs. 25000.
So you can see.
You can see.
If the expenses of both depreciation and repair are added,
then they gradually increase.
If we keep the depreciation equal.
Depreciation is Rs. 20,000 every year.
But due to the increase in repair, the total of
depreciation and repair is increasing every year.
First Rs. 20,000, then Rs. 22,000, then Rs. 23,000, then
Rs. 24,000, then Rs. 25,000.
Rs. 20,000, Rs. 22,000, Rs. 23,000, Rs. 24,000, Rs. 25,000.
Yes.
Now do you know what happens?
Friends, if your expenses are less in the beginning,
If the expenses are less in the beginning, like Rs.
20,000, Rs.
22,000, then your profit will be more.
Yes, sir. Absolutely right.
According to me, you should not have any doubt in this.
If the expenses are less, then the profit will be more.
Absolutely, sir. We agree.
And what will happen in later years?
In later years,
In later years, if the expenses are more,
Rs. 23,000, Rs. 24,000, Rs. 25,000, then our profit will be
less.
Our profit will be less.
Absolutely right.
If the expenses increase, then the profit will be less.
For once, assume that you earn the same on an average every
year.
Your savings remain the same.
Your sales remain the same in the beginning.
In the beginning, due to the decrease in expenses, the
profit will be more.
And in the later years, due to the increase in expenses,
the profit will decrease.
And your company, your organization, will have a bad
impression in the market.
That they were doing a good job in the beginning.
They were earning more profit.
Now they are not doing a good job.
Now they are earning less profit.
Their profits have fallen.
Now they are not doing a good job.
In the beginning, they were doing a good job.
Now they are not doing a good job.
This will be a bad impression.
Is this a good impression?
First of all, if you say bad, then it can be good.
Is this a good thing for the business?
Not at all, sir.
Not at all in front of people with a bad image.
And see, people will feel that they don't want to work hard.
They have not appointed hardworking employees.
They are careless.
When there is nothing like that.
These are all misconceptions.
They are working as before.
Your organization is working as before.
They are doing all the work as before.
But the profits are falling.
What is the reason for this?
The reason for this is the mixed expense of depreciation
and repair.
It remains less in the beginning years and increases later.
This is the reason for this.
And see what kind of image is being made in the market
because of this.
You are careless, you don't work hard.
Profit has fallen.
Share price will come down.
Big, big, big, big, big problems will happen.
That's why we have to find a solution for this.
What is the solution?
First of all, we have to find a solution that depreciation
plus repair.
The combined expense of both of these should remain stable.
It has to be stabilized.
We don't want the expense of depreciation and repair to
remain less in the beginning and then increase.
Because of which the profit is seen more in the beginning
and less later.
We don't want this.
We want the expense of depreciation and repair, which goes
like this, instead of going up from below, it should remain
stabilized and run evenly every year.
A little fluctuation will work a little.
There is no problem.
But to the very much extent, it should be stabilized.
We have to do something like this.
We want to do something like that.
What should be done?
Now, repair cannot be controlled.
My dear friends, repair cannot be controlled.
Depreciation plus repair.
Year 1, year 2, year 3, year 4 and year 5.
Repair is not in the beginning.
Then it is 1000, then 2000.
How did I keep it?
One minute.
2000.
Then it is 2000.
Then it is 3000.
Then it is 4000.
Then it is 5000.
2000.
3000.
4000.
5000.
2, 3, 4 and 5.
Repair cannot be controlled in this way.
We increase the life of the asset.
We keep running it in such a way that it is not repaired.
Then it will be damaged in such a way that there will be a
very good expense in repair.
Repair is a kind of maintenance.
If you keep doing it from time to time, it is okay.
Everyone drives a car, right?
Of course, sir.
So it is okay to keep doing its service from time to time.
Otherwise, there will be such an expense in it that it will
ask for a lot of money.
It is considered the right decision to get the repair done
from time to time.
We cannot stop the repair.
The repair will have to be done on the spot.
So what to do, sir?
The expense of repair will increase.
We cannot control it.
It would keep on increasing.
Tell me what to do.
That's why we change on depreciation.
Which we are charging 20,000 every time, 20,000, 20,000,
20,000, and 20,000.
We say that we will have to change a little on this.
Then we will have to control it.
Instead of applying equal depreciation, we do this.
We adopt a method in which depreciation increases in the
initial years when the expense of repair is less.
And then when the expense of repair increases, the
depreciation keeps coming down.
We have to apply such a method.
We want a method from which the depreciation remains more
in the beginning when the repair is less.
And when the repair increases, the depreciation comes down.
So what will happen with this?
In the beginning, if the depreciation is more, the repair
is less.
Then, if the repair increases, the depreciation decreases.
This stabilizes the expense.
The mutual expense of depreciation and repair gets
stabilized with this.
Over the years, the mutual expense of depreciation and
repair remains equal.
It remains equal.
It can go up and down a little.
It may not be exactly equal.
It can go up and down a little.
But we will get the stability that we wanted.
Okay, sir.
So how do we achieve this objective?
That the depreciation increases in the beginning and
decreases later.
The depreciation increases in the beginning and decreases
later.
For this, this method was invented.
My dear friends,
Return Down Value Method.
Now you must have known that this method is called WDV.
Return Down Value Method.
Why was it invented for depreciation?
To stabilize the mutual expenses of depreciation and repair,
Return Down Value Method was invented.
To stabilize,
Return Down Value Method was invented.
Okay.
This method of depreciation is introduced to provide
following advantages.
Number 1.
To stabilize the combined effect of repairs and
depreciation on the P&L account over the years so that
variation in annual profits losses is eliminated.
So that variations in annual profits losses is eliminated.
Profits should not appear less in the beginning and later.
The variation of profits should be eliminated.
That's why the combined effect of repair and depreciation
has to be stabilized.
For this, depreciation has to be increased in the beginning
when the repair is less and later when the repair is more.
So this method is useful.
Tax authorities also recognize this method.
Income tax authorities also say that
WDV method is good.
Apply it.
Now sir, tell me one thing.
You have told us why WDV was invented and what is the use
of WDV.
Now tell us.
You have told us that
WDV will cause depreciation that it will be more in the
beginning and later it will be less.
It will be high in the beginning and then it will go down.
So depreciation will go up and down and repair will go up
and down and the combined effect will be stabilized.
The combined effect will be stabilized.
Hmm.
Okay sir.
Sir, you did it like this.
You didn't do it like this.
I don't know how to do it like this.
Otherwise, I wouldn't be in Dance India.
Hmm. Okay sir.
Let's go.
Now tell me sir, how does this written down value method
work?
Written down value method says,
Take the net cost of PPE.
In our example, it was 1 lakh.
A rate of depreciation is given to you.
For example, 10%.
And it is said, take out the depreciation.
10% on 1 lakh, 10,000.
And after 10,000 depreciation on 1 lakh,
The value of PPE will remain 90,000.
Then it is said that the depreciation on the second year,
If you put it, it is only 10%.
But instead of 1 lakh, put it at 90%, that is 9,000.
Instead of 1 lakh, put it at 90%, that is 9,000.
Then it will remain 81,000.
Then put the rate of depreciation on 81,000.
10%, 8,100.
Then how much will be left? Let's do one more year.
81,000 minus 8,100.
72,900.
Then we will put depreciation on it.
Rate of depreciation 10%, 7,290.
7,290.
It will remain 6,5,610.
It will keep running like this.
So are you able to see?
Depreciation is decreasing.
Initially 10, then 9, then 8,100, then 72,90.
And it will keep on decreasing.
It will keep on decreasing.
And it is necessary to decrease.
First you are putting 10% on a bigger figure, 1 lakh.
Then you are putting 10% on a smaller figure, 90.
Then you are putting 10% on a smaller figure, 81.
Then you are putting 10% on a smaller figure.
So this decrease is necessary.
And why are we doing this?
Why are we putting 10% on smaller figures?
Because we want less depreciation.
We want depreciation to keep on decreasing.
10, 9, 81, 72, 90.
We want it.
And we have achieved the same objective.
This method is called return down value method.
Means initially putting depreciation on cost.
Then cost minus depreciation which is 90,000.
Do you know what is this 90,000 called?
WDV.
Next year's opening WDV.
Opening return down value.
This 80,000 will be called next year's opening WDV.
This 72,900 will be called next year's opening WDV.
We have to put depreciation on this.
So that our objective gets fulfilled.
Depreciation comes in reducing trend.
That's why this method comes.
This method works like this.
Okay sir.
As per this method.
Depreciation is calculated at a fixed percentage on the
opening WDV of the assets.
Depreciation is calculated at a fixed percentage on the
opening WDV of the assets.
Oh! Okay sir.
Under this method.
Depreciation goes on decreasing every year.
Every year depreciation goes on decreasing.
We have just seen.
Yes, we have just seen.
Now friends, I will give you a mathematical trick.
Will you eat?
Yes sir, give me.
Pick up the calculator.
It will come out in the calculator.
Pick up the calculator.
100 100 Write 100 on the calculator.
Now we have put depreciation.
Assume that the net cost of a PP is 100 rupees.
Okay.
So what will we do in the first year?
We will reduce 10% from 100.
90 will be left.
Yes sir.
Then we will reduce 10% from 90.
So what will be left? 81 will be left.
Then we will reduce 10% from 81.
8.1, so what will be left? 72.9 72.9 Then we will reduce
10% from it.
It will go on like this.
Yes.
So how do we apply depreciation? 100-10% Minus 10%
Minus 10%
Keep doing this.
Pick up the calculator.
Press 100.
1 0 0 100
Press the minus button.
Write 1 0 10.
1 0 10
And press the percent button.
Reached up to 90.
Yes.
Then press the minus button.
Write 1 0 10.
Press the percent button.
Reached up to 81.
Yes sir.
Then press the minus button.
Press 1 0 10.
Press the percent button.
Reached up to 72.9.
Yes sir.
So friends, just see where it will end.
Where will it end?
Just see how many years will it end?
When we apply the straight line method, then it is 20,000,
20,000, 20,000, 20,000, 20,000.
It ends completely in 5 years.
See how many years will it end?
Keep doing it.
Minus 10%
Minus 10% minus 10%
Minus 10%
Minus 10% minus 10% minus 10% minus 10% minus 10% minus 10%
minus 10% minus 10% minus 10% minus 10% minus 10% minus 10%
The accountant must be putting depreciation
By this time it will reach god
Such a long life
Why it is not ending?
This is mathematical certainty
It will never end
If you put 100% every time
Then it will end in 10 years
First you are putting 10% on 100
Then on 90
Then on next value
Then it will never be allocated
You are not distributing one figure
Every time you are changing the figure
Then how it will be distributed
Which figure will be distributed
You tell
Which figure will be distributed
You are putting percentage on different figures
Oh ho ho
One of the disadvantages of written down value method is
That the cost is never fully allocated
That one lakh will never be fully allocated
Sir, take rate of interest little high
Take 40%
Write 100
Minus 40%
It keeps on running
How much ever high rate you take
It will keep on running
Sir, let's take 100%
Let's take 100%
One zero hundred minus 100%
This is zero, sir
Tell me
Rate can never be 100%
Rate of percentage of WDV method will never be 100%
Why? Because Rate of percentage of written down value method
Which we charge on opening WDV
Every time we calculate depreciation amount
We calculate it from this formula 1 minus n residual value
divided by cost of asset into 100
And from this formula
This is mathematical certainty
I am not teaching you maths
So listen to what I am saying
From this formula
This is mathematical certainty
It will never be 100%
Okay, sir
It is also known as
Diminishing balance method
Reducing balance method
Reducing cost method
There are other names of WDV method
What are those names?
Diminishing balance method
In which balance keeps on decreasing
On which depreciation is applied
Balance keeps on decreasing
Call it reducing balance method
Call it reducing cost method
You can give any name you want
From these names also written down value method is known
Sir, tell me practically
What is practically done in market?
WDV Written down value method
WDV In fact, no one says written down value
Everyone says WDV in short form
WDV method
Okay, sir
Okay Okay Let's go, friends
So, this topic ends with
Straight line and written down value method
Now, we will study D point
Change in method
Let's do one thing
Before D
Let me see D
Change in method
Wait a minute
Let's do D
Okay Let's do D
Change in method of depreciation
As per consistency principle of accounting
An accounting policy or method
Once adopted
Should be followed consistently
Oho L is gone
Consistency is gone
Should be adopted consistently
Over the future years
Do you know what they are saying?
They are saying
If you adopt one method of depreciation
For example
If you use depreciation from straight line method
You have decided
That you will use straight line method
You don't care
That you see more profit in the beginning
See less later
You are saying
There is no problem
We take it so seriously
Our company is not a listed company
We don't have any share price trading
It goes up or down
We just need it for ourselves
We have to do accounting for ourselves
That we know how much profit we have
And we will know
That if the profit is decreasing in the coming years
It is due to the combined effect of depreciation and repair
So we don't have to do anything of WDV
We have to use straight line method
And finish the work
We have to use straight line method
And finish the work
We have chosen straight line
So one of the principles of accounting
Which is called consistency principle
What does consistency principle say?
Consistency principle says
That Once you choose a method
Of anything
Not only depreciation
But anything else
Then follow it for many years
Don't change it again and again
Otherwise, accounting will not be comparable
Accounting will not be unique
It will not be uniform
It will not have any meaning
If you keep changing it every year
It is not forbidden to change
It is not like
Once you take straight line method
Then you can't take WDV method in your life
It is not like that
But it says
Once you have adopted a method
Then you can't change it continuously follow it for few
years after that if you feel need to change then change it
follow it for few years don't change it consistently don't
change it frequently take some time to change it don't
change it frequently ok sir but in case but if it happens
that because of change method true and fair view will be
reflected and financial position of the business will be
better reflected then change should take place this is what
I said it's not that you can't change
and you will be fined it's not like that but you have the
right to change only when your financial position can be
better reflected and your accounting can be better
reflected your accounting can be better reflected who said
this? it's written in accounting standard 1 also, and
accounting standard 1 has said some more things change in
accounting policy method should be disclosed along with
their effect on financial statement of current year as well
as future year
I will show you this practically in teleprime
I will show you practically what I have circled here ok and
this and this
I will show you that our company was putting a straight
line and later it felt that accounting can be better than
WDV it adopted WDV method so what all we have to do in
accounts what all we have to do in teleprime
I will show you practically or in the beginning we were
putting WDV later we felt like putting straight line so
what will happen? that will also be taught so what will
happen? that will also be taught so this discussion for now
ends with change in method let's talk about revision of
life sir, now small topics have come now general entries
are left big topic, main is this what do you do in tele?
you do general entries, main is this so let's do
revaluation first let's do revaluation first
sorry, let's do revision of life first revision of life
this is what I was saying yes, let's do revision of life
friends, what is revision of life?
I will tell you let me tell you what is revision of life
concept we bought a PPE we bought a machinery for 2 lakhs
and we estimated its life in the beginning we estimated
estimated estimated useful life 10 years 10 years so
friends, how much depreciation will happen? sir, take
example of straight line method 2 lakhs divided by 10
depreciation of every year will be 20,000 we have put
depreciation for 4 years 20, 20, 20 and 20 we have put
depreciation for 4 years 2 lakhs minus 80,000 so 1 lakh
20,000 rupees are left so 1 lakh 20,000 rupees are left out
of 2 lakhs we have put depreciation for 20, 20, 20 we
put depreciation for 4 years what is left? 1 lakh 20,000
after 4 years 6 years life was left and we suddenly came to
know that no, no, no now it will not work for 6 years now
this PPE will die in 5 years in the beginning our estimate
was 10 years but after 4 years we came to know that it will
work only for 5 years in the beginning our estimate was 10
years but after 4 years we were thinking now we came to
know that it will work only for 5 years total life will be
9 years so the remaining 1 lakh
now you will divide it by 5 and start charging 24,000
depreciation 24, 24, 24, 24 and in the next 5 years you
will transfer it this is the effect of revision of life if
your life changes in the future then depreciation is taken
out again how did you take depreciation in the beginning? 2
lakhs you divided the net cost from the original life
10,000 to 20,000 what happens later? if there is a change
you take the remaining value which is not depreciated you
divide it by the remaining life new
life is 5 years then depreciation comes in the next 5 years
24, 24, 24, 24 ok sir the scrap value and estimated useful
life of the asset must be reviewed every year scrap value
and life should be reviewed every year if there is a need
then remaining useful life can be reassessed as well
remaining useful life can be reassessed as well if there is
a need then the remaining life can be taken out in a new
way in such a case the remaining depreciation for the
remaining period is calculated then the
cost is divided remaining new life is 5 years depreciation
is 24,000 ok sir this is revision of life now let's read
some important points now let's read some important points
now let's read some important points let's move to some
important points let's move to some important points sigh
this is the point some important points number 1
depreciation is a non-cash expense tell me the meaning of
this what is the meaning of this line if it is written in
P&L account debit side, expense side, depreciation 20,000
so don't think that depreciation you gave from your pocket
that depreciation money doesn't go in cash what goes in
cash? cost of P&P that cost is divided depreciation doesn't
have to be paid separately depreciation doesn't have to be
paid separately depreciation means the
cost which you have paid is 1 lakh that is payment, that is
your cash expense when you divide that in 5 years you give
a new name depreciation you don't pay again you don't pay
again you don't pay again only one payment is divided
depreciation depreciation doesn't have to be paid what you
have paid is divided depreciation depreciation is a
non-cash expense depreciation is derived from the word
depretium this is for airing if you want to air in your
office if you want to show people in your
how good is your general knowledge in accounts we know
about accounts we know about GK very well so you tell
depreciation is derived from the word depretium depretium
means declining trend declining trend is derived from
depretium is derived from depretium depreciation
depreciation is a nominal account depreciation is a nominal
account there are three types of accounts personal account
real account nominal account real account nominal account
there are three types of accounts personal account,
account and nominal account personal, real and nominal
personal account is that which is made from someone's name
Mohan, Sohan, Rohan, Ram, Shyam real account is that which
is an asset or liability account and nominal account is any
income or expense account nominal account any income or
expense account is nominal account depreciation is an
expense so depreciation is a nominal account going concern
assumption allows depreciation going concern assumption
allows depreciation what does it mean?
I am saying depreciation means divide the cost in life so
if you buy a PPE, it has a life of 10 years so you said we
will take it in the P&L of 10 years you assumed one thing
that business will run for 10 years if you are saying we
will divide the cost of 1 lakh in 10 years means you are
saying we will make P&L for 10 years and we will transfer
it so if you have decided that you will make P&L for 10
years so my dear friends you have accepted that business
will run for 10 years this is going
assumption that you have accepted that business will run in
the coming years so when going concern assumption allows
that business will run in the coming years then only you
can apply depreciation for depreciation it is necessary
that business will run going concern says that business
will run depreciation can be provided on component basis
what does it mean? take the example of aeroplane in
aeroplane in itself aeroplane is a plant machinery in that
engine is different furniture seats are
many things are there
ACs are different engine is different, depreciation of AC
is different seats are different in whole aeroplane
depreciation rate is not same on different parts on
different components depreciation is different on AC,
engine, chair, tyre
AC everything is different on fan on cockpit on hand mic
this rate is taken on component basis one rate in whole
aeroplane no depreciation is provided on land because land
have infinite life no depreciation is provided on land
because land have infinite life no depreciation is provided
on land because land have infinite life see friends some
people teach you let me tell you do you know what they
teach that land does not depreciate because depreciation
means depreciation in asset value and land
never depreciates that's why land value always increases
that's why land never depreciates such things are taught
and child says yes it's right land value always increases
never depreciates land value never decreases so will land
depreciate first thing is depreciation does not mean
depreciation in asset value depreciation means sharing
asset value in life but still depreciation does not happen
land rates depreciate who said it does not congress was
more in power main reason
I taught you two methods of depreciation one is straight
line method and one is WDV method what is the formula of
straight line method divide net cost from estimated useful
life life is required to get depreciation from straight
line method life is required to get depreciation from net
cost life is required to get depreciation from return down
value method no sir in that we multiply opening WDV by rate
rate comes from this formula in this formula life is
required 1-n under root residual value
by cost of asset into 100 where n is equal to useful life
means in return down value method when you get depreciation
you multiply opening WDV by rate and to get that rate you
need useful life means from any method you get depreciation
you need life you need useful life of that asset you get
depreciation from any rate sorry from any method and my
dear friends land life land life my dear friends is
infinite land life is infinite land life is infinite
ok land life is infinite you will divide anyone from
infinity will you not get any solution watch a video of
Ramanujan on YouTube why Ramanujan was afraid of infinity
you will get to know watch it on YouTube that's why you
don't need land because to get depreciation we need life
and land life is infinite ok these are knowledge things if
you will talk like this then never put depreciation on land
never put depreciation on land because land life is
infinite land bill will be there your business
bought land you will put depreciation on it you will say
this is PPE you will say land is PPE you can touch it and
see you can even jump on it and use it in business we are
using land here and its life life is more than 12 months
infinity means more than 12 months so he is fulfilling all
three conditions it is PPE but the method to put
depreciation to calculate the value of depreciation the
formulas will require life and life is infinity that's why
we don't put depreciation on land now some
will see in their office land and building will be
depreciating and will start killing me sir you said no but
land and building is depreciating land and building is
different land and building means the land below and this
building so building is included if there is an asset
called land and building then depreciation will be put on
it because you know the life of building in that we will
consider land life in such case if the value of land and
building is low then you put depreciation you
some land
I bought this room so I gave money to this land and this
building so building is PPE we know the life of building so
I have to put depreciation on it so in such case I will not
bifurcate that how much is the value of my land and how
much is the value of my building one or two walls on the
side and one wall above we will not do this we will put
depreciation on the value of land and building ok sir
software is an intangible asset
I told you there will be no depreciation on software
because it is out of the definition of PPE
software is out of the definition of PPE because it is not
tangible it is intangible so the first condition was not
fulfilled so PPE was not made so depreciation will not be
put on it depreciation is also charged in case of loss if
your firm is in loss then you cannot say that we will not
put depreciation sir if you should not say then why we will
not put depreciation on loss
I told you the general thing that you should not have any
doubt that if there is loss then we should not put
depreciation loss or profit or anything depreciation will
not stop whether it is winter, summer, rain, sun autumn,
spring, winter your studies do not stop you always do it so
depreciation will continue whether it is profit, loss,
break even point, neutral point more profit, less profit,
more loss, less loss depreciation will continue
depreciation is an amortized expenditure depreciation
an amortized expenditure depreciation means amortized
expenditure depreciation is another word depreciation is
another word amortized expenditure the total expenditure
you have done amortize it in life you can ignore this point
if you want ok so our this point also ends so what all we
have covered sir meaning of depreciation straight line
written down value method, change in method revision of
life some important points in next class we will do
revaluation and will try to proceed to general
will try to proceed to general entries will try to proceed
to general entries will try to proceed to general entries
my dear friends ok sir now see what is your duty now your
responsibilities have increased you have grown up, started
earning started working in office the younger brothers and
sisters of the street who are taking admission in commerce
they will ask you what is depreciation they will ask you
what is depreciation will you tell them the same will you
teach the new generation the
will you teach the new generation the same will you teach
the new generation the same depreciation over its useful
life is called depreciation will you teach the new
generation the same will you teach the new generation the
same bitter truth is better than sweet lie bitter truth is
better than sweet lie ok sir so revise them straight line
method
WDV formula change in method revision of life some
important points some important points so see all these
things revise and sit in next class you will enjoy a lot
and when it will be over we will talk about revaluation and
general entries are the most important we will take a lot
of time in general entries why? what to do in telly we have
to do general entry of adoption what else to do in telly
here it will take time in general entries here the concept
will be clear is there any problem? no
ok sir thank you thank you thank you thank you bye bye