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PROFILE OF SAHARA INDIA PARIWAR Sahara India Pariwar is an Indian multi-business conglomerate with diversified business interests that include financial services, housing finance, mutual funds, life insurance, city development, real estate activities, print and television media, film production, sports, information technology, health care, tourism, hospitality and consumer products. It owns the New IPL team Sahara Pune Warriors and also sponsors the Indian Cricket and Hockey teams. WE CHASE QUALITY, QUANTITY CHASES US -Sahara India Pariwar Quality is their essence and they always stressed on the Qualitative aspect. Consequently in this run for quality, quantity has always pursued by them. They look forward to reaching the zenith and reaffirm their commitment to the process of sound nation- building. Core Commitments - Their Strength
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PROFILE OF SAHARA INDIA PARIWAR

Sahara India Pariwar is an Indian multi-business conglomerate with

diversified business interests that include financial services, housing finance,

mutual funds, life insurance, city development, real estate activities, print

and television media, film production, sports, information technology, health

care, tourism, hospitality and consumer products. It owns the New IPL team

Sahara Pune Warriors and also sponsors the Indian Cricket and Hockey

teams.

WE CHASE QUALITY, QUANTITY CHASES US

-Sahara India Pariwar

Quality is their essence and they

always stressed on the Qualitative

aspect. Consequently in this run for

quality, quantity has always pursued

by them. They look forward to

reaching the zenith and reaffirm their

commitment to the process of sound

nation-building.

Core Commitments - Their Strength

Emotion: Emotion is in Performance of genuine duties towards the loved

ones primarily in their benefit, from their point of view. EMOTION is THE KEY

that generates the required energy and enthusiasm for desired quality

performance.

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Discipline: The enthusiastic obedience of laws and orders, which are given

by the rightful authority.

Duty: The enthusiastic obedience of laws and orders, which are given by

their CONSCIENCE.

Quality: Results from honouring Rules, Regulations, Commitments, Values,

Fairness, Performance of Duties by honestly balancing one's own and others'

reasonable point of view in the matters of Material & Emotional aspects.

Truth: Means total transparency in action, reaction, attitude and all other

expressions and the conviction to follow the right course.

No Discrimination: Never should

they discriminate in any of their

actions, reactions, attitudes,

decisions, conclusions, and in any of

their expressions while caring for the

six healths of other human beings,

namely physical, material, mental,

emotional, social and professional

healths.

Give Respect: To definitely make others feel important and respected by

giving sincere regard to others' feelings, reasonable wishes & thoughts with

an open and receptive mind and warmth.

Religion: There is a religion higher

than religion itself - it is

NATIONALITY. They practise their

religions in the confines of their

homes, but outside, they should be

Indians and only Indians.

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'Bharatiyata' or Nationalism thus

becomes our supreme religion. 

Collective Materialism: Means to progress and prosper together for

collective sharing and caring and not individually or for a select group.

Absolute Honesty: People

generally manipulate and deceive for

achieving their unreasonable desires

and greed if others do not or cannot

see, hear or understand. But they

firmly believe that their mind inside

knows the truth and they should be

absolutely honest to their mind inside

and accordingly their actions,

reactions, directions, decisions and

all their expressions should be

present in all human dealings.

Self-Respect: To develop a sense of respect for oneself in others' mind, i.e.

to generate genuine & warm feelings for oneself among others on a

continuous basis.

SAHARA INDIA PARIWAR'S PHILOSOPHY - "Collective

Materialism"

In any human relationship, it becomes imperative to take into consideration

the materialistic aspect of life - we do so but by giving it second priority.

The first priority is given to emotional aspect and with perfect blending of

materialism with emotionalism, results in continuous collective growth for

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collective sharing and caring, that gives an impetus to our philosophy -

"COLLECTIVE MATERIALISM".

BHARTIYATA

There is a religion higher than

religion itself - it is the INDIAN

NATIONALITY. The swirl of the

Tricolour never fails to move a

Sahara Worker. For they believe, it is

the great feeling that transcends all

castes, creed and sects. Bharat Parva

is Celebrated on every 26th of

January and 15th of August with a

spirit and gaiety rarely seen.It comes

from our heart.

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SUBRATA ROY SAHARA-An ENTREPRENEUR

"Saharasri" - Subrata Roy Sahara

Subrata Roy Sahara was born on 10th June 1948 at Araria 40 km. north to

Purnia, Bihar, he is the Managing Worker and Chairman of the Sahara Group

of companies based in India. Sahara is based upon Subrata Roy Sahara’s

belief in the ethos of a family (the reason why the group is called a Pariwar -

family in Hindi) and was termed by the Time magazine as ‘the second largest

employer in India after the Indian Railways’. From an asset base of USD 43 in

1978 when it was founded, the group has today exponentially grown to

become a major business conglomerate in India. He is the Richest Bengali

Person in India after Amar Bose, founder of Bose Corporation, USA

Subrata Roy received his Bachelor of Engineering, Electronics and

Communication Engineering, in 1996 at National Institute of Technology

Durgapur and MS, Computer Engineering from San Jose State University,

USA, in 2007. Subrata Roy married to Swapna in 1974 and they have two

sons. He possesses a huge private property at Lucknow in Uttar Pradesh

called Sahara City. He is well known for his flashy lifestyle. His rise is also

associated with his close proximity with Amar Singh, a business man and

political leader of Samajwadi Party and its President and founder, Mulayam

Singh Yadav.

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The Man and His Vision:

He has talked about problems and proposed the solutions on 5 social issues

namely Population, Education, Political (Election) system, Media & Religion,

besides interacting on various aspects of life and professional life. According

to him if these five issues are taken care of properly, our beloved country

shall be the best in the world.

“Saharasri” Idealogy

In business profit earnings and overall growth of business get the highest

priority and are certainly creditable, but ultimate credibility of business

enterprise, particularly of larger ones is in the utilisation of profit, be it for

best possible upliftment of its workforce and for espousing Social, National

Development causes or for rendering services to mankind as a whole.

Fulfilling the Qualitative aspect of utilisation of profit, the world's largest

family ‘Sahara India Pariwar' is proud to have reached today new horizons of

growth and development.

On the basis of our philosophy of Collective Materialism we have always

given importance to the fact that profit earning is the Quantitative aspect

whereas the proper utilisation of profit is the Qualitative aspect. Ironically,

we only recognise and get recognised by the Quantitative aspect.

I, therefore earnestly appeal to one and all in Politics, Media, Business etc.

that every action, reaction, selection, appreciation or criticism should be

oriented strictly towards the Qualitative aspect. I appeal to anybody and

everybody to accord top priority to Qualitative aspect in anything and

everything for peaceful, prosperous and progressive co-existence of mankind

anywhere and everywhere.

Today, I feel proud of the fact that I am the Guardian of the World's largest

family. Perhaps, I am the world's only person whose family is so vast, so

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disciplined, so dedicated and so committed. Such a vast family as Sahara

India Pariwar has a grand and infinite future and I am sure that we will

sustain our duty, consciousness, discipline and dutifulness with a sense of

dedication, as we have always done in the past, so that together we could

build an India full of energy and radiance.

Subrata Roy Sahara has pursued a large number of philanthropic endeavors,

and his company is involved a activities like monthly financial assistance to

the families of the Martyrs of the Mumbai Nov '08 terror attack and to the

families of Kargil War Martyrs, projects in the fields of rehabilitation of a

million victims of natural disasters, health, education and nutrition

programmes for children and women, adult literacy and vocational training

initiatives, behaviour change communication programmes, rehabilitation of

physically challenged people, mass marriage ceremonies of 101

underprivileged girls on annual basis and support to National Cadet Corps

(NCC) forms part of Sahara’s universe of concern.

Awards/Achievements for Subrata Roy

The ITA TV ICON (2007) Mother Teresa Millennium Award for Renowned Industrialist

(2005) Global Leadership Award (2204) Businessman of the year Award (2002) Best Industrialist (2002) National Citizen Award (2001) Karmaveer Samman (1995) Udyamshree (1994) Baba-E-Rozgar (1992) Noble Citizen Award (1986)

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Subrata Roy Sahara has also written two books 'Shanti, Sukh & Santushti’

and ‘Maan, Samman, Atmasamman’ on the philosophy of life.

Shanti, Sukh: Santushti

Through this book it is absolutely convincing that the most dominating need

of every human is strong security feeling of life, health, material, respect and

love and then more material, more respect and more love. 24 hours - 365

days all your actions, reactions, planning and all expressions revolve around

the above needs and continuous achievement of all these depends on you

and you need not depend on others.

Maan-Samman, Atmasamman

Emotions are of two kinds - love and respect. Love is an inferior emotion

which has been given by God to fulfill your reasonable, unreasonable needs.

But in human society since we have the thinking power, respect for others

and sense of self-respect are the most superior emotions.

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SAHARA INDIA PARIWAR PRODUCT DIVISION

FINANCE:

Sahara India Life Insurance

Company Limited: The first wholly

Indian Owned Private Life Insurance

Company with presence in most

parts of the country. It has a team of

well trained and committed

professional advisors with special

focus on rural areas and the less

affluent segments of the Indian

society. The company offers an

exhaustive range of competitive

products that caters to individuals of

all ages and segments along with

prompt and quality customer

services and support.

Sahara Asset Management

Company Private Limited: A

disciplined and professional Fund

House bringing World Class

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performances in Mutual Fund

Management.

Sahara Housingfina Corporation

Limited: A National Housing Bank

regulated & BSE listed company. In

India, housing finance market is

around Rs. 1, 20,000 crore (USD

25,580 million) with a growth rate of

around 20%.

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INFRASTRUCTURE & HOUSING

Aamby Valley City is planned as an

exclusive City nestled across 10,600

acres of the majestic Sahayadris in

the pristine Western Ghats. The

project envisages development of a

premium, self-contained City with a

well laid out world class

infrastructure and facilities for

premium living, leisure and

entertainment, sports and adventure,

knowledge and education, hospitality

and fine dining, advanced

healthcare, meetings and

conferences etc. in a highly secured

environment.

SAHARA CITY HOMES: The world's

largest chain of integrated townships

ranging from approx. 80-300 acres

offering amenities superbly matched

to international standards being

developed in number of Tier I, Tier II

& Tier III cities across India. A Sahara

City Homes Integrated township shall

typically consist of a gated

community with residential units in

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the form of apartment towers,

townhouses and individual houses.

Sahara Grace: The premium

residential complexes typically

designed on 10-30 acres, comprising

solely of residential units like

apartments, villas and penthouses.

SAHARA STAR, MUMBAI: A world-

class 5-Star Hotel spread over 7.42

acres and located adjacent to the

Mumbai domestic airport, it is the

flagship hotel project of Sahara India

Pariwar. Currently, it has 210 guest

rooms, 13 suites and 9 restaurants

which are expandable to 412 rooms

and 13 restaurants. It contains some

of the best modern features like

World's largest pillarless clear-to-sky

dome of its kind, World's first

Hemisphere-shaped Glass Elevators,

Marine Aquarium, Lagoon area,

Inward and Outward facing rooms,

Glass Roof rooms, Spacious Parking

and shall have amenities like Sahara

Health and Wellness Centre, Multi-

cuisine restaurants and Preview

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theatre.

SAHARA HOSPITAL, LUCKNOW: A

state-of-the-art, multi-speciality,

tertiary care hospital providing world

class facilities with more than 50

super specialities and latest

generation equipments under one

roof. This hospital got operational in

February 2009 and is currently

operating with approximately 350

beds, including 120 bed Critical Care

Infrastructure and expandable to 554

beds. It is spread on 31 acres and

contains ultra-modern centre for

preventive and alternative medicines

like Ayurveda, Homoeopathy,

Naturopathy and Yoga for Holistic

approach.

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MEDIA & ENTERTAINMENT:

SAHARA ONE: 24 hours digitally

encrypted Entertainment Channel

spread globally.

FILMY: 24 hours digitally encrypted

Movie Channel.

SAHARA ONE MOTION PICTURES:

Has always provided a platform for

unique and quality cinema and

continues its quest to entertain all

kind of audience. It has released over

35 films and won 5 National Awards

Geon Studios: Designs, develops and

delivers cutting - edge digital visual

effects for domestic and international

feature film and television projects.

SAMAY: Round-the-clock free-to-air

National Hindi news channel.

SAHARA SAMAY: Round-the-clock

36 city specific Regional news

channels.

RASHTRIYA SAHARA: 38 Editions of

Hindi Daily Newspaper with 6 Printing

Centers.

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SAHARA TIME: 1 National Edition –

72 pages English Weekly with Pan

India News Network.

ROZNAMA RASHTRIYA SAHARA:

15 Editions of Urdu Daily Newspaper

with 9 Printing Centers.

AALMI SAHARA: AALMI SAHARA: 28

pages International Urdu Weekly.

BAZM-E-SAHARA: 100 Pages

Monthly Magazine.

Cinema Halls: Developing Largest Chain of Multiplexes in India. Around 230

x 3 screens throughout the country

Film City: Developing world-class film city on around 100 acres of land with

an investment of 180 crores (USD 41.74 million) approximately and with an

Academy.

News Section: 50 Bureaus, 1000 Correspondents across the globe & over

1600 V-SATs for news collection.

COMMODITY SALES WITH SERVICES AND RETAIL CHAIN:

SAHARA COMOSALE

SAHARA COMSERVS

SAHARA CARE

India’s largest commodity sales and Services Company. We shall soon be

having our full-fledged working bases with staff at over 2800 offices in India

and 16 more countries with 23 offices having 100 franchisees in each

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country like England, China, Germany, South Africa, Saudi Arabia, West

Indies, Sri Lanka, New Zealand, USA, Australia, Japan, Qatar, Dubai, Russia,

Nepal, and Bangladesh.

Offering a range of Consumer Products

At present our product division offers a range of products of everyday use as

well as objects of desire through a chain of showrooms called 'Unique' in

various locations of India. The number of these showrooms is proposed to be

increased to 6000. The products offered come under three categories

   1. Sahara Select - Fashion & Lifestyle Products

   2. Sahara Care - Daily Need Products and

   3. Sahara Sports - Fitness & Leisure Products

MANUFACTURING:

ARARIA JUTE PROJECT : Is engaged

in creating self- employment to bring

forth socio-economic development of

the people of Araria, through its

training-cum-R&D centre and

produces eco-friendly, biodegradable

top export quality diversified jute

products e.g. Blankets, Carpets, Floor

covering, Handicrafts, Jute Chappals

etc. and successfully creating high

demands both in Domestic and

International Market.

INFORMATION TECHNOLOGY:

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SAHARA NEXT: Providing IT

Services, Outsourcing, Web Media

and Mobile Interactivity & Application

Solutions.

Depreciation

Meaning

The value of assets gradually reduces on account of use. Such reduction in value is known as depreciation. A non-cash expense that reduces the value of an asset as a result of wear and tear, age, or obsolescence. Most assets lose their value over time (in other words, they depreciate), and must be replaced once the end of their useful life is reached. There are several accounting methods that are used in order to write off an asset's depreciation cost over the period of its useful life. Because it is a non-cash expense, depreciation lowers the company's reported earnings while increasing free cash flow.

Definitions

Different authors have given different definitions of depreciation, such as:

"Depreciation may be defined as the permanent continuous diminution in the quality, quantity or value on an asset."  (By Pickles)

"Depreciation is the gradual permanent decrease in the value of an asset from any cause."  (By Carter)

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"Depreciation may be defined as a measure of the exhaustion of the effective life of an asset from any cause during a given period." (By Spicer & Pegler)

Depreciation is the diminution in intrinsic value of an asset due to use and/or the lapse of time."  (By Institute of Cost and Management Accountants, England)

"Depreciation is the reduction in the value of a fixed asset occasioned by physical wear and tear, obsolescence or the passage of time."  (Northcott & Forsyth)

Characteristics of Depreciation:

Depreciation has the following characteristics:

1. Depreciation is charged in case of fixed assets only. e.g., building, plant and machinery, furniture etc. There is no question of depreciation in case of current assets - such as stock, debtors, bills receivable etc.

2. Depreciation causes perpetual, gradual and continual fall in the value of assets.

3. Depreciation occurs till the last day of the estimated working life of the asset.

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4. Depreciation occurs on account of use of asset. In certain cases, however, depreciation may occur even if the assets are not used, e.g., leasehold, property, patent, copyright etc.

5. Depreciation is a charge against revenue of an accounting period.

6. Depreciation does not depend on fluctuations in market value of assets (see difference between depreciation and fluctuation page).

7. The amount of depreciation of an accounting year cannot be determined precisely - it has to be estimated. In certain cases, however, it may be ascertained exactly, e.g., leasehold property, patent right, copyright etc.

8. Total depreciation of an asset cannot exceed its depreciable value (cost less scrap value).

Causes of Depreciation:

The main causes of depreciation may be divided into two categories, namely:

1. Internal Cause and2. External Causes

Internal Causes

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Depreciation which occurs for certain inherent normal cause, is known as internal depreciation. The main causes of internal depreciation are:

Wear and Tear:

Some assets physically deteriorate due to wear and tear in use. More and more use of an asset, the greater would be the wear and tear. Physical deterioration of an asset is caused from movement, strain, friction, erosion etc. An obvious example of this is motor car which rapidly wears out. Other assets like this are building, plant, machinery, furniture, etc. The wear and tear is general but primary cause of depreciation.

Depletion:

Some assets declines in value proportionate to the quantum of production, e.g. mine, quarry etc. With the raising of coal from coal mine the total deposit reduces gradually and after sometime it will be fully exhausted. Then its value will be reduced to nil.

External Causes

Depreciation caused by some external reasons is called external depreciation. The main external causes are as follows:

Obsolescence:

Some assets, although in proper working order, may become obsolete. For example, old machine becomes obsolete with the invention of more economical and sophisticated machine whose productive capacity is generally larger and cost of production is therefore less. In order to survive in the competitive market the manufacturers must must install new machines replacing the old ones. Again, it may happen that the articles produced by old machine are no longer saleable in the market on account of change of habit and taste of the people. In such a case the old machine, although in good working condition, must be discarded and the new one purchased.

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Efflux of Time:

Some assets diminish in value on account of sheer passage of time, even though they are not used e.g., leasehold property, patent right, copyright etc. Suppose we take a lease of a house for 10 years for $10,000. Its annual depreciation will be $1,000 (10,000/10), irrespective of the the whether the house has been used or not. Because with the end of lease after 10 years, the house will go out of possession.

Accident:

Assets may be destroyed by abnormal reasons such as fire, earthquake, flood etc. In such a case the destroyed asset must be written off as loss and a new one purchased.

Need for Depreciation

The Need for depreciation arises for the following reasons:

Ascertainment of True Profit or Loss:

Depreciation is a loss. So Unless it is considered like all other expenses and losses, true profit or loss cannot be ascertained. In other words, depreciation must be considered in order to into out true profit or loss of a business.

Ascertainment of True Cost of Production:

Goods are produced with the help of plant and machinery which incurs depreciation in the process of production. This depreciation must be considered as a part of the cost of production of goods. Otherwise, the cost f production would be shown less than the true cost. Sales price is fixed normally on the basis of cost of production. So, if the cost of production is shown less by ignoring depreciation, the sale price will also be fixed at low level resulting in a loss to the business.

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True Valuation of Assets:

Value of assets gradually decreases on account of depreciation, if depreciation is not taken into account, the value of asset will be shown in the books at a figure higher than its true value and hence the true financial position of the business will not be disclosed through balance sheet.

Replacement of Assets:

After sometime an asset will be completely exhausted on account of use. A new asset must then be purchased requiring a large sum of money. If the whole amount of profit is withdrawal from business each year without considering the loss on account of depreciation, necessary sum may not be available for buying the new asset. In such a case the required money is to be collected by introducing fresh capital or by obtaining loan or by selling some other assets. This is contrary to sound commerce policy.

Keeping Capital Intact:

Capital invested in buying an asset, gradually diminishes on account of depreciation. If loss on account of depreciation is not considered in determining profit or loss at the year end, profit will be shown more. If the excess profit is withdrawal, the working capital will gradually reduce, the business will become weak and its profit earning capacity will also fall.

Basic Factors of Determination of Depreciation

For calculation depreciation the basic factors are:

1. The original cost of the asset.2. The estimated working life of the asset or the number of

years the asset is expected to last.

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3. The estimated residual or scrap value at the end of its life. It is the value which the asset will fetch when discarded as useless.

4. The amount to be spent periodically for repairs and renewals. If the repairs necessary to keep the asset in a proper state of efficiency are regularly carried out, the life of the asset is prolonged and the amount of annual depreciation is proportionately lowered.

5. The possibility of the asset becoming obsolete. If there are great chances of improvements being made in a particular asset on account of inventions, higher depreciation should be written off such an asset.

Usually engineers and experts give their opinion about these and they are accepted by businessmen. After getting information on all these points, it is easy to access the rate of depreciation.

Methods of Calculating Depreciation

The charge of depreciation can impact the net profit in the income statement, so the methods of calculating depreciation are very important. Adopting different methods of calculation, the result will be different. And it'll refer to the expense and tax in the income statement. Choosing the fit methods of calculating depreciation, it needs to be faced by the finance staff.

There are several possible methods of calculating depreciation:

1. Straight line method

2. Written Down Value Method

3. Annuity Method

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4. Depreciation Method

5. Insurance Policy Method

6. Revaluation Method

7. Depletion Method

Fixed Installment or Original Cost or Straight Line Method, reducing/Diminishing Balance method

Under this method depreciation is not calculated on cost of asset. It is computed on the book value. of asset. The book value of the asset is obtained by deducting depreciation from its cost. The book value of asset gradually reduces on account of depreciation charge. Since the depreciation percent rate is applied on reducing balance of asset. this method is called reducing balance or diminishing installment method or written down value method.

Advantages of Straight-Line Depreciation

Straight-line depreciation, also known as the fixed or equal-installment depreciation method, is the simplest and most widespread form of depreciation used by businesses. It is suitable for assets that operate uniformly and consistently over the life of the item. The fixed method is straightforward, uncomplicated, easy to understand and simple to apply. Each year the same amount of money is taken as a depreciable business expense on the company's tax return. Straight-line depreciation is suitable for less expensive items, such as furniture, that can be written off within the asset's defined legal, estimated or commercial life. The IRS sets guidelines for estimating an asset's useful life.

Disadvantages of Straight-Line Depreciation

Most pieces of office equipment, machinery and other items purchased do not perform exactly the same each year. As

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assets age they become less efficient. Repair costs usually increase over time. Straight-line depreciation does not account for the loss of efficiency or the increase in repair expenses over the years and is, therefore, not as suitable for costly assets such as plant and equipment. The functional life span of some assets cannot clearly be estimated. The straight-line depreciation method should not be used when the useful life of an asset is unpredictable.

Yearly Depreciation= Original cost of asset- Estimated Scrap Value/Estimated Life of the asset

For example, a company purchased a car on 1 January at a cost of $24,000. The company estimates that its useful life is four years, after which he will trade it in for $4,000. The annual depreciation charge is to be calculated using the straight line method.

Depreciation charge = ($24,000 - $4,000)/4= $5,000 p.a.

Written Down Method

Under this method the depreciation charge will be higher in the earlier years of the life of the asset. Here needs a percentage to apply. And in the first year the percentage is applied to cost but in subsequent years it's applied to the asset's net book value (alternatively known as written down value).

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Advantages Of Reducing Balance Method Of Depreciation

The main advantages of reducing balance method of depreciation are listed below

* Reducing balance method is easy to understand and simple to implement. Depreciation is calculated every year on the opening balance of asset.* Reducing balance method equalizes the yearly burden on profit and loss account in respect of both depreciation and repairs. The amount of depreciation goes on decreasing while the expenses on repairs goes on increasing, so that the total charge against revenue over different years remains more or less the same.

* Reducing balance method is acceptable for income tax purposes

* Reducing balance method matches the cost and revenue of the business. The greater amount of depreciation provided in initial years is matched against the higher amount of revenue generated by increased production by the use of new asset.

Disadvantages Of Reducing Balance Method Of Depreciation

The main demerits of reducing balance method are as follows:

* Reducing balance method charges heavy amount of depreciation in earlier years.

* The formula to obtain rate of depreciation can be applied only when there is residual value of the asset.

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Reducing balance depreciation method

Using the straight line depreciation method, the calculation of the annual depreciation charge is as follows:

31 December Rs.

Original machine cost 75,000

2003 Depreciation in 2003 (40% cost) 30,000

Written down value at 31 December 2003 45,000

2004 Depreciation in 2004 (40% of WDV @ 31 December 2003) 18,000

Written down value at 31 December 2004 27,000

2005 Depreciation in 2005 (40% of WDV @ 31 December 2004) 10,800

Written down value at 31 December 2005 16,200

2006 Depreciation in 2006 (40% of WDV @ 31 December 2005) 6,480

Written down value at 31 December 2006 9,720

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2007 Depreciation in 2007 (40% of WDV @ 31 December 2006) 3,888

Written down value at 31 December 2007 5,832

The reducing balance method can result in significant differences in the annual depreciation charge, depending on the "percentage" of written-down value that is used to calculate the charge.

In the example above, the total amount charged to depreciation in the first three years of owning the machine (2003-2005) was £58,800 (compared with £39,000 if a straight line depreciation method has been used).

To compare the reducing balance method with the "straight line" method, we have provided a worked example using the

Annuity method

The method recognizes the time value (Interest) of money and hence regards the real cost of using a long-lived asset equivalent to the actual amount invested thereon plus the interest lost on the acquisition of asset. Under this method, so much depreciation is written off each year as after debiting the asset account with interest upon the diminishing value, will reduce the asset to nil at the end of its life. Thus, the amount written off as depreciation is the same every year, but the interest will diminish each year.

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The amount of annual depreciation to be written off by Annuity method will be ascertained from Annuity Tables

Advantages:

Useful method to use in respect to long-term lease which generally involve considerable capital outlay

Interest on capital investment is taken into account. This method is perceived to the most exact, precise and scientific form from the point of view of calculations.

Disadvantages:

Though interest is taken into consideration but the rate is still arbitrary and not based on law

Computation using this method becomes more complicated where there are frequent additions, dismantling, etc taking place. Not so suitable for assets like Plant & Machinery.

Depreciation Fund Method

Under this method, a fixed amount is charged as depreciation every year. It endeavors to provide the required lump sum cash at the retirement of a long, lived asset by annually setting aside and investing a fixed sum in readily realizable securities. These securities earn interest at fixed rate and the same being reinvested along with successive fixed installments of depreciation, allowed to accumulate at compound interest. The sinking fund method thus takes into account of this probable income from interest while fixing the annual depreciation and

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investing the same which together with compound interest accumulated to the asset's depreciable cost by the end of its useful life. Obviously, the fixed installment of annual depreciation is here smaller as compared to straight line method. Its magnitude, however, rests on the asset's life span and interest rate. Longer the span and higher the rate, smaller is the annual depreciation per rupee of depreciable cost.

Advantages of Depreciation Fund Method Or Sinking Fund Method:

The most important advantages of this method is that it makes available a sum of money for the replacement of the asset, which has become useless. If separate provision was not made, the sum required to purchase the new asset will have to be drawn from the business which might effect the financial position of the concern adversely.

Disadvantages of the Depreciation Fund Method Or Sinking Fund Method:

1. The burden on profit and loss account goes on increasing as years pass by since the amount of depreciation every year remains same but the amount spent on repairs goes on increasing as the asset becomes old.

2. It can also be said that the work of investing money is complicated.

3. Prices of securities may fall at the time when they are to be realized as a result of which loss may have to be suffered.

Insurance Policy Method

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Insurance policy method is a slight modification of the depreciation fund method or sinking fund method. Under this method the amount represented by the depreciation fund, instead of being used to buy securities, is paid to an insurance company as premium. The insurance company issues a policy promising to pay a lump sum at the end of the working life of the asset for its replacement.

The advantage of insurance policy method is that risk of loss on the sale of investment and the trouble and expense of buying investment are avoided, while disadvantage lies that the interest received on the premiums paid is comparatively very low.

When insurance policy method is employed the policy account will take the place of the depreciation fund investment account and no interest will be received at the end of each year, but the total interest on the premiums will be received when the policy matures.

Entries:

Every years two entries will be made:

1. In the beginning:

  Depreciation insurance policy account

       To Cash account

 (Being the payment of premium on depreciation policy)

2. At the end of the year:

  Profit and loss account

       To Depreciation fund account

 (Being the amount of depreciation charged to profit and loss account)

When the policy will mature i.e., to say the amount of the policy

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will be received. The entry is:3. Cash account

       To Depreciation insurance policy account

  (Being the policy amount realized)

The depreciation insurance policy account will show some profit. This will be transferred to depreciation fund account, the entry being.

4. Depreciation insurance policy account

       To Depreciation fund account

  (Being the policy amount realized)

The asset account will have been shown throughout at its original cost. It now be written off by transfer to depreciation fund account. The entry is:

5. Depreciation fund account

       To Asset account

Insurance Policy Method Example:

On 1st January, 1990 a business purchases a three year lease of premises for $20,000 and it is decided to make a provision for replacement of the lease by means o an insurance policy purchased for annual premium.

Show the ledger accounts dealing with this matter.

Solution:

Leasehold Account

Dr. Side Cr. Side1990 1990

Jan. 1To Cash 20,000Dec. 31

By Depreciation fund

20,000

Depreciation Fund Account

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Dr. Side Cr. Side

1990 199

0

Dec. 31

To Balance c/d 6,400 Dec. 31

By Profit and loss a/c

6,400

1991

Dec. 31

To Balance c/d 12,800 Jan. 1

By Balance b/d

6,400

Dec. 31

By Profit and loss a/c

6,400

12,800 12,800

1992 199

2

Dec. 31

To Leasehold Property

20,000 Jan. 1

By Balance b/d

12,800

Dec. 31

By Profit and loss a/c

6,400

"By Leasehold

800

20,000 20,000

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Leasehold Policy Account

Dr. Side Cr. Side

1990 199

0

Dec. 31

To Cash 6,400 Dec. 31

By Balance c/d

6,400

1991 199

1

Jan. 1

To Balance b/d 6,400 Dec. 31

By Balance c/d

12,800

Dec. 31

To Cash 6,400

12,800 12,800

To Balance b/d 12,800 By Cash 20,000

To Cash 6,400

800

20,000 20,000

Revaluation Method

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As the name implies under revaluation method, the assets are valued at the end of each period so that the difference between the old value and the new value, which represents the actual depreciation can be charged against the profit and loss account. This method is mostly used in case of assets like bottles, horses, packages, loose tools, casks etc. On rare occasions when on revaluation the value of an asset is found to have increased, it being of temporary nature not taken into account.

Revaluation method is open to various objections.

Firstly, the method do not specify as to which is the value that the experts are to estimate at the end of each year. It however appears that this is the market value. If so, to assess depreciation with reference to market value is against the basic principles and theory of depreciation. A fixed asset has nothing to do with market value.

Secondly, the charge against profit and loss account on account of depreciation will vary year to year through the asset renders the same service throughout of its life time.

Thirdly, this method is unscientific, because there are great chance of manipulations.

Depletion Method

Depletion method of depreciation is especially suited to mines, quarries, sand pits, etc. According to it the cost of the asset is divided by the total workable deposits. In this way, rate of depreciation per unit of output is ascertained. Depreciation in any particular year is charged on the basis of the output during that year.

Example:

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A mine was acquired at a cost of $20,00,000 the quantity of minerals expected to be mined is 5,00,000 tons, the rate of depreciation per unit will be $4 i.e., (20,00,000 / 5,00,000). If during the year 25,000 tons minerals is extracted, the amount of depreciation will be 25,000 × 4 = $1,00,000.

Difference Between Depreciation and Fluctuation:

Depreciation of asset and fluctuation in its market value are not the same. For example, a businessman purchase a machine the life of which is estimated at 10 years and charges depreciation accordingly each year. If for certain reasons the market value of the machine decreases by say 20%, the businessman need not consider this decrease at all. Because the productive capacity or the utility of the machine to the businessman has not been reduced on account of fall in its market value. So he will not have to suffer any loss, unless he sells the machine. But the machine is not intended for sale - it will be used permanently in the business. So the business will ignore the fall in market price. But depreciation cannot be ignored - it must be considered. Thus we see that there is no relationship between depreciation and fluctuation. The points of difference between depreciation and fluctuation are stated below in a tabular form:

  Depreciation     Fluctuation

1. It reduces productive capacity or utility of asset.

  1. It does not reduce productive capacity or utility of asset.

2. It must occur   2. It may not occur

3. It reduces value of asset gradually.

  3. The value of asset may arise or fall on account of fluctuation.

4. Loss by way of depreciation must be

  4. Generally it is not taken into account. However, in case of

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considered. current assets permanent fall in price is considered.

5. It is a regular loss - it must be charged throughout the working life of asset.

  5. It is generally irregular.

6. It always indicates loss   6. It may indicate either profit or loss. Increase in market value means profit, while decrease means loss.

Depreciation of Various Assets:

Freehold Land and Building:

It means that land and building which has been purchased out right and not on lease. In the case of building it will be seen that in its early life, few repairs will be needed. These repairs will keep the building in proper order. But after sometime the building will begin to decay and even the repairs will not succeed in keeping it in proper working order. Efficient repairs, no doubt, add to the life of the building, but they cannot make it everlasting. After some considerable time the building will practically fall in spite of all the repairs. Hence it is absolutely necessary to charge depreciation on such building, so that by the time it falls down, its book value also disappears from the books of accounts. As this asset possesses a long life, the method of depreciation employed should be such as it provides a fund for its reconstruction on its dilapidation. Thus either of the straight line method or reducing installment method may be adopted to depreciate this asset.

One of the peculiarly of the land is that it does not generally depreciate. Its value may and does fluctuate from time to time,

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but such fluctuations do not influence depreciation in any way. Consequently older accountants were of the opinion that land should be left at the cost price in the books. According to modern opinion the idea of the depreciation with regard to land cannot be ruled out entirely. Agricultural land may loss its fertility. Brick land may depreciate. as such, in some cases at least land must be depreciated.

Leasehold Land and Building:

By leasehold is meant the land that is taken on lease for a certain number of years. The most general duration is 99 years, but may of course be less or much more. If the lease under which the property is acquired is short, the fixed installment method or straight line method of depreciation can be applied conveniently. If on the other hand, it be a long lease, the annuity method of depreciation would be more suitable. The value of the leasehold property should be written off during the term of the lease and the rate of depreciation should be fixed accordingly.

Plant and Machinery:

This term includes machinery of different kinds e.g., engines, boilers, fixed plant, running machinery, etc. As the working life of each one of them is different, the rate of depreciation should also be different. Though fixed installment method or straight line method can be suitably applied to depreciating plant and machinery but owing to the difficulty of calculating depreciation on additions made during the year, the diminishing balance method is generally employed to depreciate this asset.

Loose Tools:

As this asset is liable to breakage and pilferage, it should be annually valued. The difference between the present value and the value as per last balance sheet should be treated as depreciation.

Furniture and Fixture:

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The diminishing balance method is usually employed to depreciate this asset. The rate of depreciation should be high enough to reduce it to its residual value at the end of its working life.

Patents and Copyrights:

There is a maximum legal life of such assets but the commercial life (during which such assets can be effectively exploited) may even be shorter. The assets should be depreciated by the straight line method so that it is written off within the legal or commercial life whichever is shorter.

Mines, Oil Well, Quarries, Etc:

The depreciation should be estimated by the depletion method.

Goodwill:

Goodwill has been defined as the benefit or advantage arising from regular public patronage on account of facilities offered. The name under which the business is carried on acquires a reputation and consequently a saleable value. It can be sold only when entire business is sold off. It is an intangible asset. Though goodwill is a fixed asset it does not depreciate on account of wear and tear like plant and machinery etc. As goodwill is not consumed in the process of earning income, it is not necessary to depreciate it. But as no business, howsoever well established, can have perpetual life, it is advisable to create a reserve from the profit and loss account in prosperous years because when profits fall and goodwill depreciates it may be difficult to write it off.