Mnemonics: Depreciation and Amortisation | Accounting for CA Foundation PDF Download

Depreciation and Amortisation are essential concepts for understanding how assets lose value over time, impacting financial statements and business profitability. Mastering this topic enables students to allocate asset costs accurately using various methods, a skill crucial for financial reporting. The accompanying mnemonic aids in memorising key principles, making it easier to navigate calculations and concepts with confidence.
DECAY - Diminishing Economic Cost Allocated Yearly.

Happy mnemonic learning!

Concept of Depreciation

Mnemonic: WEAR-DOWN

• W - Wear and tear from use
• E - Expiration over time
• A - Aging (obsolescence)
• R - Reduction in market value
• D - Depletion (e.g., natural resources)
• O - Over time allocation
• W - Wear reflects cost usage
• N - Net income matching

Mnemonic Explanation: The mnemonic "WEAR-DOWN" captures the reasons and process of depreciation. Each letter represents Wear and tear, Expiration, Aging, Reduction, Depletion, Over time allocation, Wear reflects cost usage, and Net income matching, imagining an asset wearing down over its useful life.

Key Factors for Depreciation

Mnemonic: CLU (Cost-Life-Useful)

• C - Cost of the asset
• L - Life (estimated useful life)
• U - Useful (residual value)

Mnemonic Explanation: The mnemonic "CLU" helps recall the three key factors for computing depreciation: Cost, Life (estimated useful life), and Useful (residual value), picturing a club of elements essential for depreciation calculation.

Depreciation Methods

Mnemonic: SDFMP (Straight-Diminishing-Fraction-Machine-Production)

• S - Straight-Line Method (constant charge)
• D - Diminishing Balance Method (decreasing charge)
• F - Sum of Years of Digits (fraction-based)
• M - Machine Hour Method (hours-based)
• P - Production Units Method (production-based)

Mnemonic Explanation: The mnemonic "SDFMP" covers the main depreciation methods: Straight-Line, Diminishing Balance, Sum of Years of Digits, Machine Hours, and Production Units, imagining a stamp of methods applied to assets.

Objectives of Depreciation

Mnemonic: CRAFT (Correct-Funds-Accurate-Future-True)

• C - Correct Income Measurement
• R - Funds for Replacement
• A - Ascertainment of True Cost
• F - Future planning (profit retention)
• T - True Position Statement

Mnemonic Explanation: The mnemonic "CRAFT" outlines the objectives of depreciation: Correct Income Measurement, Funds for Replacement, Ascertainment of True Cost, True Position Statement, and Future planning, picturing a craft building a solid financial foundation.

Depletion Method

Mnemonic: MINE (Measure-Extract-Units-Resource)

• M - Measure total resource cost
• I - Identify extraction amount
• N - Normalise per unit rate
• E - Extracted units depreciate

Mnemonic Explanation: The mnemonic "MINE" simplifies the depletion method: Measure total resource cost, Identify extraction amount, Normalise per unit rate, and Extracted units depreciate, picturing a mine where resources are gradually used up.

Amortisation of Intangible Assets

Mnemonic: CARU (Cost-Allocate-Review-Useful)

• C - Cost of intangible asset
• A - Allocate over useful life
• R - Review periodically
• U - Useful life adjustment

Mnemonic Explanation: The mnemonic "CARU" outlines the amortisation process for intangible assets: Cost, Allocate over useful life, Review periodically, and Useful life adjustment, picturing a car driving through the asset’s lifecycle.

Difference: Depreciation vs Amortisation

Mnemonic: PAT-PIN

• P - Physical: Applied to tangible assets (Depreciation) vs Intangible assets (Amortisation)
• A - Allocation: Allocates cost of machinery (Depreciation) vs goodwill (Amortisation)
• T - Tangible: For plant, furniture (Depreciation) vs trademarks (Amortisation)
• P - Periodical: Charged yearly (both)
• I - Intangible: Not applicable (Depreciation) vs Applicable (Amortisation)
• N - Non-physical: Tangible (Depreciation) vs Non-physical (Amortisation)

Mnemonic Explanation: The mnemonic "PAT-PIN" highlights the distinction between Depreciation (PAT) and Amortisation (PIN), focusing on Physical, Allocation, Tangible, Periodical, Intangible, and Non-physical aspects, like pins separating the two concepts.

Need for Depreciation

Mnemonic: MATCH-FEARS

• M - Matching concept
• A - Asset valuation
• T - Tax purpose
• C - Cost recovery
• H - Help in replacement
• F - Fair profit measurement
• E - Expense recognition
• A - Accounting standards compliance
• R - Reduce overstated assets
• S - Systematic allocation

Mnemonic Explanation: The mnemonic "MATCH-FEARS" outlines the need for depreciation: Matching concept, Asset valuation, Tax purpose, Cost recovery, Help in replacement, Fair profit measurement, Expense recognition, Accounting standards compliance, Reduce overstated assets, and Systematic allocation, picturing a match igniting financial accuracy.