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Depreciation is amount decrease in value of Fixed assets and charged in to operational Expenses over the life of assets. In other words we can say that depreciation is decrease in the value of the assets due to use,obsolance,wear and tear

Depreciation is required both for

(1) Accounting Purpose

(2) Tax purpose

Here I am providing you ,a very easy way to understand various depreciation method and its Journal Entry

Q What is the accounting journal entry for   depreciation

Answer:

 

For example PQR  Company calculates that it should have $1,000 of depreciation expense . The entry is:

Date	Description	Debit	Credit
31-Dec-16	Depreciation Expenses	1000
	To accumulated Depreciation		1000

 

or you can pass the entry in the following way

Date	Description	Debit	Credit
31-Dec-16	Depreciation Expenses	1000
	T0 Assets		1000

 

Now we will check different depreciation method

Following are listed Depreciation method

1. Straight line method
2. Double Declining method
3. Sum-of-the-years’-digits method
4. Annuity method
5. Machine hour rate method

(1)Straight line method

This is also known as fixed percentage method .In this method  equal amount is allocated for each accounting period as depreciation expensses.The formula of straight line method of depreciation is cost minus Salvage value divided by years of life

=( Cost-salvage Value) / Useful life

Example

fixed asset having a useful life of 5 years is purchased on 1 January 2012. Cost of the asset is $11,000 whereas its residual value is expected to be $1000.

Calculation  of  depreciation under Straight line method

=11000-1000/5

=2000 Depreciation  each year

Year	Opening Balance	Depreciation	Closing Balance
1	11000	2000	9000
2	9000	2000	7000
3	7000	2000	5000
4	5000	2000	3000
5	3000	2000	1000
Sale			-1000
Balance			0

 

(2)Double Declining Method

This is accelerated  method of depreciation in which higher depreciation is recognized during the first few years of its useful life. This method is used under the following cases

(1) when the use of assets is at  rapid rate during the early part of its useful life;

(2)When company wants to recognize more expense at early stage, thereby shifting profit recognition further into the future (which may be of use for deferring income taxes).

There are two approach one is accelerated depreciation by 200% and another is accelerated by 150%

Double-declining balance (ceases when the book value = the estimated salvage value)

2  ×  Straight-line depreciation rate  ×  Book value at the beginning of the year

Or if accelerated by 150% then the formula will be as follow

 

1.5×  Straight-line depreciation rate  ×  Book value at the beginning of the year

Now we will see the example

Take the above straight line case , in this case the rate of depreciation is 20%

so in double declining we take 40% i.e.2  x 20%,Ckeck the following

 

 

Year	Initial Cost	Depreciation rate	Depreciation	Ending value
1	11000	40%	4400	6600
2	6600	40%	2640	3960
3	3960	40%	1584	2376
4	2376	40%	950.4	1425.6
5	1425.6	40%	425.6	1000

Last year depreciation amount is adjusted to the Salvage value

(3) Sum-of-the-years’-digits method

This method of depreciation is another method of accelerated depreciation. Depreciation is calculated  as a fractional part of a sum of all the years.

Example:

In the above example if we apply Sum-of-the-years’-digits method then  an asset has a life of 5 years and total is 15 calculated as 1+2+3+4+5 = 15

Now see the following table

Year	Time remaining	SYD	Applicable rate	Annual Depriciation
1	5	5/15	33.33%	3333
2	4	4/15	26.67%	2667
3	3	3/15	20%	2000
4	2	2/15	13.33%	1333
5	1	1/15	6.67%	667
				10000

 

(4) Annuity method of depreciation

The other method of depreciation do not take into account the interest lost on capital invested in the asset. This Annuity Method Consider this.

In this annuity method an interest at  fixed rate on the opening balance of asset is debited to asset account each year and then the cost of asset together with interest thereon is written off equally over the life of the asset

Example

Suppose a lease is purchased on 1–1-2011 for the 4   years for the cost of 10,000 .Company proposed to  depreciate lease by annuity method by charging interest at 5 %.Annuity table shown to  $1 for 4 years at the rate of 5% you must written off sum of 0.2820 each year. the whole calculation for the 4 year

Debit		Lease Account		Credit
1/1/2011	To Bank A/C	10000		By Depreciation A/c	2820
31/12/11	To Interest A/C (5 %on 10,000)	500		By Balance C/f	7680
		10500			10500
1/1/2012	To Balance B/d	7680		By Depreciation A/c	2820
31/12/12	To Interest A/C ((5 %on 7680)	384		By Balance C/f	5244
		8064			8064
1/1/2013	To Balance B/d	5244		By Depreciation A/c	2820
31/12/13	To Interest A/C	262		By Balance C/f	2686
		5506			5506
1/1/2014	To Balance B/d	2686		By Depreciation A/c	2820
31/12/14	To Interest A/C	134			0
		2820			2820

 

1. (5) Machine hour rate method

This method is mostly used  where the work is performed primarily on machines. First of all you need to calculate  total life of any fixed asset on the basis of its working hours life. Now divide the cost less salvage value by total hours. Now we have obtain the depreciation rate per hour. Annual depreciation is equal to working hours of fixed assets in year with depreciation rate per hour. Check out the following formula

Hourly depreciation rate

=Cost-salvage value  / Estimated life of machine in hours

Depreciation rate per year

=Working of the hours for the year x Hourly depreciation rate

 

Suppose fixed asset having a useful life of 5 years is purchased on 1 January 2012. Cost of the asset is $16,000 whereas its residual value is expected to be $1000.and the working hours during the life is 15000 and for particular year is 3500,3500,3000,2500,2500

Check out the following table for per year depreciation

Hourly depreciation rate

=16,000-1000  / 15000

=1 per Hour

Depreciation  1st year

=3500 X1

=3500

Year	Hour	Dep. Rate per Hour	Annual Depreciation
1	3500	1	3500
2	3500	1	3500
3	3000	1	3000
4	2500	1	2500
5	2500	1	2500

For more help you can mail us to [email protected]

 

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Ratio Analysis and its Formula

A ratio analysis is a mathematical analysis  of financial statement of the company. Ratio analysis is based on balance sheet  and profit and loss account statement.  Ratio analysis is used to evaluate various aspects of a company’s operating and  financial performance such as its efficiency,  profitability ,liquidity etc. These relationships between the financial statement accounts help investors, creditors, and internal company management understand how well a business is performing and areas of needing improvement.

Ratios are also compared  for different year of the same company or  different companies in the same sector to see how they perform during the period up, and to get an idea of comparative analysis.

Ratio analysis can broadly divided between

1. Profitability ratio
2. Liquidity ratio
3. Balance sheet ratio

Following are the main Ratio , their formula and what the ratio Indicate

Sr No	Type of ratio	Formula	What Indicate
Profitability Ratios( Income statement Ratio)
1	Gross Profit Ratio	Gross Profit/Net Sales	Gross Profit Generated By each dollar of Sales
2	Operating Profit ratio	Operating Profit/Net Sales	Operating  Profit Generated By each dollar of Sales
3	Net Profit Margin (Return on Sales)	Net Income/ Net Sales	Net Profit Generated By each dollar of Sales
4	Return on Investment Ratio	Net Profit After Interest  And Taxes/ Shareholders Funds or Investments	Income earned on Investment
5	Return on Capital Employed Ratio	Net Profit after Taxes/ Gross Capital Employed	Return On Capital Invested
6	Dividend Pay Out Ratio	Dividend Per Equity Share/Earning Per Equity Share	Dividend Received
7	Earning Per Equity Share	Net Profit after Tax & Preference Dividend / No. of Equity Share	Earning Per Share
8	Dividend Yield Ratio	Dividend Per Share/ Market Value Per Share	Yield of Dividend Comparative to Market Price
9	Price Earnings Ratio	Market Price Per Share Equity Share/ Earning Per Share	company’s share price to its per-share earnings
10	Du Pont Return on Assets	(Net Income /Sales)   x (Sales/Assets)   x (Assets/Equity)	Indicate how the company generates its return
Liquidity Ratios
11	Working Capital	Current Assets- Current Liabilities	Indicate Working Capital of the company
12	Current Ratio	Current Assets/Current Liabilities	Indicate firm’s ability to pay off its liabilities with its Current Assets
13	Quick Ratio	Liquid Assets/Current Liabilities	Indicate firm’s ability to pay off its liabilities with its with quick Cash Assets
14	Acid Test or Quick Ratio	Cash + Marketable Securities + Accounts Receivable/ Current Liabilities	Indicate firm’s ability to pay off its liabilities with its with quick Cash Assets
15	Cash Ratio	Cash Equivalents + Marketable Securities/Current Liabilities	Cash balance of the company comparative to its current Liability
Balance sheet ratio
16	Inventory Ratio	Net Sales / Inventory	How many time Company’s inventory is sold
17	Total Debts to Assets	Total Liabilities / Total Assets	Proportion of there company’s Assets finance by the debt
18	Debtors Turnover Ratio	Total Sales /  Account Receivables	Indicate the number of times average debtors are turned over during a year
19	Debt Collection Ratio	Receivables  x Months or days in a year / Net Credit Sales for the year	Indicate approximate amount of time that it takes for company to receive its receivable
20	Creditors Turnover Ratio	Net Credit Purchases / Average Accounts Payable	How Effectively Company pay its supplier
21	Average Payment Period	Average Trade Creditors / Net Credit Purchases X 100	Indicate approximate amount of time that it taken by company to pay its Supplier
22	Working Capital Turnover Ratio	Net Sales / Working Capital	Indicate Company’s effectiveness in Using its Working Capital
23	Fixed Assets Turnover Ratio	Cost of goods Sold / Total Fixed Assets	Indicate Company’s effectiveness in using its Fixed assets to generate revenue
24	Capitalization Ratio	Long-Term Debt  /  Long-Term Debt + Owners’ Equity	Indicate debt component of a company’s capital structure
25	Capital Turnover Ratio	Cost of Sales / Capital Employed	Indicate Company’s effectiveness in using its Capital to generate revenue
26	Debt Equity Ratio	Total Long Term Debts / Shareholders Fund	Indicate relationship between the capital contributed by creditors and the capital contributed by shareholders
27	Proprietary Ratio	Shareholders Fund/ Total Assets	Indicate proportion of shareholders’ equity to total assets
28	Capital Gearing ratio	Equity Share Capital / Fixed Interest Bearing Funds	Indicate the Financial Leverage
29	Debt Service Ratio	Net profit Before Interest & Taxes / Fixed Interest Charges	availability of Cash to serving its Debt Charges

 

 

 

 

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Commerce stream is always an evergreen stream  to study and for making a career .In the today’s world of globalization and  with the positive changing scenario around the world’s economy the importance of the commerce stream increasing. The main subjects of commerce stream are Account,Finance,Business and economics.

International commerce includes careers in management, trade, finance, law and logistics. Prospective candidates should have experience with import and export compliance, auditing, financing, taxation, and legal recourse.

Various Carrier Option

Accountant

The basic duty of Accountant is to prepares asset, liability, and capital account entries by compiling and analyzing account information. He prepare the Documents financial transactions by entering account information and Recommends financial actions by analyzing accounting options.

Cost Accountant

The Main Task of cost Accountant is to Construct data accumulation systems for a cost accounting system and create and review the controls needed for data accumulation and reporting systems. He review standard and actual costs for inaccuracies. Perform cost accumulation tasks as a member of the target costing group

Commerce Manager

Main Duty of commerce manager is create company objectives and implement strategies in order to maximize profits and gain global market share. He should update policies accordingly and may be responsible for securing the appropriate government approvals and licenses. For this position in most of the company, you should have Master of Business Administration (MBA) Degree

Finance Specialist

This is the another option for Commerce stream student. finance professionals create models to evaluate business opportunities and assist in creating global operating plans. He should implement and oversee budgets as well as review business proposals, including mergers and acquisitions. For this position in most of the company, you should have Master of Business Administration (MBA) Degree

Compliance Attorney

Compliance Attorney will follow trade legislation and help assess regulatory risk. Attorneys work closely with compliance departments and provide legal support and expertise on international audits and regulations Employers require candidates to have a Juries Doctor (J.D.)

 

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