Question

Briefly explain how to account for a change in depreciation method.

Answer 1

The depreciation is a method of allocation of cost to a particular period based on the methods adopted by the organization. The depreciation of all the assets is written off over their period of life using such methods.

In a few cases where the management of the organization may adopt to change the method of depreciation under various circumstances

• When it is required by any statute or law
• Any standards compliances and even
• When it feels the change of such method results in appropriate and fair presentation disclosure of financial statements etc

During such change, if any increment of the depreciation to be charged i.e., the depreciation is lesser than the depreciation to be charged after adopting the change in method of depreciation, such excess depreciation should be debited to " Profit and loss account " of the year in which the change took place.

Example; Accumulated depreciation =20000. Depreciation to be charged after the change in method is 25000, then the excess depreciation should be debited to " Profit and loss account "

Entry: Profit and loss account Dr 5000 ------

Asset account ------- 5000

In case, if the depreciation charged is more then the actual to be charged after the change then such excess accumulated depreciation shall be credited to " Profit and loss account "

Example; Accumulated Depreciation = 25000, actual depreciation to be charged after the change in method is =20000. Such excess depreciation already charged shall be credited to " Profit and loss account "

Entry: Asset account Dr 5000 ------

Profit and loss account ------ 5000.