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Group Depreciation

This document explains group depreciation, a method used when dealing with a large number of similar, low-value assets, such as computers in a large organization.

The Need for Group Depreciation

When a company owns a vast number of similar assets (e.g., thousands of computers), tracking individual depreciation and disposal becomes impractical. Group depreciation simplifies this process by treating the entire group of assets as a single unit.

Key Characteristics of Group Depreciation:

  • Assets are treated as a single group, not individually.
  • A single depreciation rate is applied to the total cost of the group.
  • No gain or loss is recognized on the disposal of individual assets within the group.

Example: Software Company's Computers

Let's consider a software company with a large number of computers:

Year 1:

  • Purchase: 100 computers @ ₹50,000 each = ₹50 lakhs
  • Journal Entry:
    • Debit: Computers ₹50 lakhs
    • Credit: Cash ₹50 lakhs
  • Depreciation (20% straight-line): ₹50 lakhs * 20% = ₹10 lakhs
  • Journal Entry:
    • Debit: Depreciation Expense ₹10 lakhs
    • Credit: Accumulated Depreciation ₹10 lakhs

Year 2:

  • Purchase: 200 computers @ ₹50,000 each = ₹100 lakhs
  • Journal Entry:
    • Debit: Computers ₹100 lakhs
    • Credit: Cash ₹100 lakhs
  • Total Computer Value (Beginning of Year 2): ₹50 lakhs + ₹100 lakhs = ₹150 lakhs
  • Depreciation: ₹150 lakhs * 20% = ₹30 lakhs
  • Journal Entry:
    • Debit: Depreciation Expense ₹30 lakhs
    • Credit: Accumulated Depreciation ₹30 lakhs

Year 3:

  • Purchase: 400 computers @ ₹50,000 each = ₹200 lakhs
  • Journal Entry:
    • Debit: Computers ₹200 lakhs
    • Credit: Cash ₹200 lakhs
  • Total Computer Value (Beginning of Year 3): ₹150 lakhs + ₹200 lakhs = ₹350 lakhs
  • Depreciation: ₹350 lakhs * 20% = ₹70 lakhs
  • Journal Entry:
    • Debit: Depreciation Expense ₹70 lakhs
    • Credit: Accumulated Depreciation ₹70 lakhs
  • Accumulated Depreciation Balance (End of Year 3): ₹10 lakhs + ₹30 lakhs + ₹70 lakhs = ₹110 lakhs

Year 4: Exchange of Computers

  • Exchange: 50 old computers for 400 new computers + ₹170 lakhs cash.
  • Journal Entry:
    • Debit: Computers ₹170 lakhs
    • Credit: Cash ₹170 lakhs
  • Total Computer Value (Beginning of Year 4): ₹350 lakhs + ₹170 lakhs = ₹520 lakhs
  • Depreciation: ₹520 lakhs * 20% = ₹104 lakhs
  • No gain or loss is recognized on the exchange of the 50 computers.

Sale of an Individual Computer:

If a single computer costing ₹50,000 is sold for ₹3,000, the entry is:

  • Debit: Cash ₹3,000
  • Credit: Computers ₹50,000
  • Credit: Accumulated Depreciation ₹47,000 (Balancing figure)

Explanation: The difference between the original cost and the cash received is treated as an adjustment to accumulated depreciation, rather than recognizing a gain or loss.

Rationale and Alternatives

The rationale behind group depreciation is practicality. Managing individual records for a massive number of low-value assets is burdensome.

Alternatives:

  • Individual Asset Tracking: If accounting software allows efficient tracking of individual assets, or if the number of assets is manageable, individual depreciation and disposal accounting can be used.
  • Composite Depreciation: Similar to group depreciation, but used for assets that are dissimilar but have similar useful lives.
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