CHANGE IN METHOD OF DEPRECIATION :
Consistency principle of accounting requires that same accounting practices and methods should be observed and followed from year to year as otherwise the reported profit or loss will not be comparable. Hence, it is expected that the concern should consistently follow the method of depreciation which is once chosen. However, sometimes, a change in the method becomes inevitable.
According to “Accounting Standard-6 (AS-6) Depreciation Accounting”, issued by the Institute of Chartered Accountants of India, when a change in the method of depreciation is made, depreciation is re-calculated in accordance with the new method from the date of asset coming into use. In brief, change in method is permitted retrospectively, that is, from the date of purchase of existing assets.
| Steps for change in method of depreciation |
| – Calculate the value of asset by the new method on the date of change. – Calculate the depreciation of the past period of asset by both the existing and new method. – Find the difference between the both. – Then the difference has to be adjusted in the current year’s asset account by giving debit or credit to profit and loss account. |
Illustration:
M Ltd. which depreciates its machinery @ 10% per annum according to diminishing balance method, had on 1st April, 2012 Rs.4,86,000 balance in its machinery account. During the year ended 31st March, 2013, the machinery purchased on 1st April, 2010 for Rs.60,000 was sold for Rs. 40,000 on 1st October, 2012 and a new machinery costing Rs.70,000 was purchased and installed on the same date; installation charges being Rs.5,000.
The company wants to change its method of depreciation from diminishing balance method to straight line method w.e.f. 1st April, 2010 and adjust the difference before 31st March, 2013, the rate of depreciation remaining the same as before.
Show the machinery account for the year ended 31st March, 2013.
Solution:
Dr. Machinery Account Cr.
|
2012 Apr. 1 |
To Balance b/d | 4,86,000 |
2012 Oct. 1 |
By Bank | 40,000 |
| Oct. 1 | To Bank (cost and installation charges) |
75,000 | By Profit and Loss A/c (loss on sale of machinery) |
6,170 | |
| 2013 Mar. 31 |
By Depreciation A/c | 60,180 | |||
| By Profit and Loss A/c (Additional depreciation) |
5,400 | ||||
| __________ | By Balance c/d | 4,49,250 | |||
| 5,61,000 | 5,61,000 |
Working Notes:
| Rs. | |
| (1) Calculation of loss on sale of machinery: | |
| Cost of machinery on April 1, 2010 | 60,000 |
| Less: Depreciation for 2010-11 | 6,000 |
| 54,000 | |
| Less: Depreciation for 2011-12 | 5,400 |
| 48,600 | |
| Less: Depreciation for half year | 2,430 |
| Book value as on 1st October, 2012 | 46,170 |
| Less: Amount realised from sale | 40,000 |
| Loss on sale | 6,170 |
| i(i) Additional depreciation: | |
| Cost of machinery on 1st April, 2010 (4,86,000x 100/90×100/90) | 6,00,000 |
| Book value on 1st April, 2010 for machinery sold in 2012 | 60,000 |
| Book value on 1st April, 2010 on original group | 5,40,000 |
| Depreciation for 2 years (2010-11 and 2011-12) @ 10% on ` 5,40,000 | 1,08,000 |
| Less: Depreciation provided for 2 years under diminishing balance method (` 54,000 + `48,600) | 1,02,600 |
| Additional depreciation due to change in the system charged to profit and loss account | 5,400 |
| (3) Depreciation for 2012-13 | |
| On machinery sold | 2,430 |
| On machinery purchased and installed | 3,750 |
| On machinery brought from previous year (i.e. on ` 5,40,000 on straight line method) | 54,000 |
| 60,180 |