ALL CONTRACTS ARE AGREEMENTS BUT ALL AGREEMENT,contract,promise,agreement,consideration,contract act 1872,enforceability by lawS ARE NOT CONTRACTS

It is a valid and true statement. Before we can critically examine the statement, it is necessary to understand the meaning of agreement and contract. According to section 2(a) "every promise on every set of promises forming the consideration for each other an agreement.

It is fact an agreement is a proposal and its acceptance, by which two or more person or parties promises to do abstain from doing an act. But a contract according to section 2(h) of the Indian Contract Act, "An agreement enforceable by law is a contract. It is clear these definitions that the there elements of a contract ore

(a) Agreement Contractual Obligation

(b) Enforceability by Law.

For Example: X invites his friend to tea and the latter accepts the invitation. This is a social agreement not a contract because it does not imply any legal obligation.

We can say that (a) All contracts are agreements, (b) But all agreements are not contracts. (A) All Contracts are Agreements

For a Contract to be there an agreement is essential; without an agreement, there can be no contract. As the saying goes, "where there is smoke, there is fire; for without fire, there can be no smoke". It could will be said, "where there is contract, there is agreement without an agreement there can be no contract". Just as a fire gives birth to smoke, in the same way, an agreement gives birth to a contract.

Another essential element of a contract is the legal obligation for the parties to the contract, there are many agreements that do not entail any legal obligations. As such, these agreements cannot be called contracts.

All Agreements are not Contracts :

An agreement is termed a contract only when it is enforceable by law. All agreements are not necessarily legally enforceable. It can rightly be said that an agreement has a much wider scope than a contract. For example that agreements are not legally binding are an invitation to dinner or to go for a walk and its acceptance. These are agreements not contracts.

An agreement does not necessarily imply a legal obligation on the parties to the agreement. It is import here to clarify what exactly is an obligation. Obligation is a legal tie which imposes upon a person or persons the necessity of doing or abstaining from doing definite act or acts.

An agreement need not necessarily be within the framework of law and be legally enforceable. If it is, then it is a contract. A promises B to do physical harm to C whom, the latter does not like and B promises to pay A Rs. 1000 to do that, it cannot be termed as a contract because such an act would be against the law. Any agreement of which the object or consideration is unlawful is void and cannot be called a contract.

It would be clear from what has been said so far that an agreement has a much wider scope than a contract. An Agreement implies fulfilling some agreed condition. It does not necessarily imply that the stipulated conditions conform to the law and are enforceable by it. It may be said that an agreement is the genus of which contract is the species. It also makes it clear that all agreements are not contracts but all contracts are agreements.

METHODS OF DEPRECIATION

DEFINE DEPRECIATION, WHAT ARE VARIOUS METHODS OF DEPRECIATION?

DEFINITION:

“DEPRECIATION IS THE GRADUAL AND PERMANENT ECREASE IN THE VALUE OF AN ASSET DUE TO ANY CAUSE”

Depreciation refers to two very different but related concepts:

1. the decrease in value of assets (fair value depreciation), and
2. the allocation of the cost of assets to periods in which the assets are used (depreciation with the matching principle).

Accounting concept

In determining the profits (net income) from an activity, the receipts from the activity must be reduced by appropriate costs. One such cost is the cost of assets used but not currently consumed in the activity.^[1] Such costs must be allocated to the period of use. The cost of an asset so allocated is the difference between the amount paid for the asset and the amount expected to be received upon its disposition. Depreciation is any method of allocating such net cost to those periods expected to benefit from use of the asset. The asset is referred to as a depreciable asset. Depreciation is a method of allocation, not valuation.^]

Effect on cash

Depreciation expense does not require current outlay of cash. However, the cost of acquiring depreciable assets may require such outlay. Thus, depreciation does not affect a statement of cash flows, but cost of acquiring assets does.

Methods of depreciation

There are several methods for calculating depreciation, generally based on either the passage of time or the level of activity (or use) of the asset.

Straight-line depreciation

Straight-line depreciation is the simplest and most-often-used technique, in which the company estimates the salvage value of the asset at the end of the period during which it will be used to generate revenues (useful life) and will expense a portion of original cost in equal increments over that period. The salvage value is an estimate of the value of the asset at the time it will be sold or disposed of; it may be zero or even negative. Salvage value is also known as scrap value or residual value.

Straight-line method:

Book value at beginning of year	Depreciation expense	Accumulated depreciation	Book value at end of year
$17,000 (original cost)	$3,000	$3,000	$14,000
$14,000	$3,000	$6,000	$11,000
$11,000	$3,000	$9,000	$8,000
$8,000	$3,000	$12,000	$5,000
$5,000	$3,000	$15,000	$2,000 (scrap value)

If the vehicle were to be sold and the sales price exceeded the depreciated value (net book value) then the excess would be considered a gain and subject to depreciation recapture. In addition, this gain above the depreciated value would be recognized as ordinary income by the tax office. If the sales price is ever less than the book value, the resulting capital loss is tax deductible. If the sale price were ever more than the original book value, then the gain above the original book value is recognized as a capital gain.

Declining-balance method (or Reducing balance method)

Depreciation methods that provide for a higher depreciation charge in the first year of an asset's life and gradually decreasing charges in subsequent years are called accelerated depreciation methods. This may be a more realistic reflection of an asset's actual expected benefit from the use of the asset: many assets are most useful when they are new. One popular accelerated method is the declining-balance method. Under this method the book value is multiplied by a fixed rate.

Annual Depreciation = Depreciation Rate * Book Value at Beginning of Year

Book value at beginning of year	Depreciation rate	Depreciation expense	Accumulated depreciation	Book value at end of year
$1,000 (original cost)	40%	$400	$400	$600
$600	40%	$240	$640	$360
$360	40%	$144	$784	$216
$216	40%	$86.40	$870.40	$129.60
$129.60	$129.60 - $100	$29.60	$900	$100 (scrap value)

When using the double-declining-balance method, the salvage value is not considered in determining the annual depreciation, but the book value of the asset being depreciated is never brought below its salvage value, regardless of the method used. The process continues until the salvage value or the end of the asset's useful life, is reached. In the last year of depreciation a subtraction might be needed in order to prevent book value from falling below estimated Scrap Value.

Since double-declining-balance depreciation does not always depreciate an asset fully by its end of life, some methods also compute a straight-line depreciation each year, and apply the greater of the two. This has the effect of converting from declining-balance depreciation to straight-line depreciation at a midpoint in the asset's life.

It is possible to find a rate that would allow for full depreciation by its end of life with the formula:

,

where N is the estimated life of the asset (for example, in years).

Activity depreciation

Activity depreciation methods are not based on time, but on a level of activity. This could be miles driven for a vehicle, or a cycle count for a machine. When the asset is acquired, its life is estimated in terms of this level of activity. Assume the vehicle above is estimated to go 50,000 miles in its lifetime. The per-mile depreciation rate is calculated as: ($17,000 cost - $2,000 salvage) / 50,000 miles = $0.30 per mile. Each year, the depreciation expense is then calculated by multiplying the rate by the actual activity level.

Sum-of-years' digits method

Sum-of-years' digits is a depreciation method that results in a more accelerated write-off than straight line, but less than declining-balance method. Under this method annual depreciation is determined by multiplying the Depreciable Cost by a schedule of fractions.

depreciable cost = original cost − salvage value

book value = original cost − accumulated depreciation

Example: If an asset has original cost of $1000, a useful life of 5 years and a salvage value of $100, compute its depreciation schedule.

First, determine years' digits. Since the asset has useful life of 5 years, the years' digits are: 5, 4, 3, 2, and 1.

Next, calculate the sum of the digits. 5+4+3+2+1=15

The sum of the digits can also be determined by using the formula (n²+n)/2 where n is equal to the useful life of the asset. The example would be shown as (5²+5)/2=15

Depreciation rates are as follows:

5/15 for the 1st year, 4/15 for the 2nd year, 3/15 for the 3rd year, 2/15 for the 4th year, and 1/15 for the 5th year.

Book value at beginning of year	Total depreciable cost	Depreciation rate	Depreciation expense	Accumulated depreciation	Book value at end of year
$1,000 (original cost)	$900	5/15	$300 ($900 * 5/15)	$300	$700
$700	$900	4/15	$240 ($900 * 4/15)	$540	$460
$460	$900	3/15	$180 ($900 * 3/15)	$720	$280
$280	$900	2/15	$120 ($900 * 2/15)	$840	$160
$160	$900	1/15	$60 ($900 * 1/15)	$900	$100 (scrap value)

Units-of-production depreciation method

Under the units-of-production method, useful life of the asset is expressed in terms of the total number of units expected to be produced:

Suppose, an asset has original cost $70,000, salvage value $10,000, and is expected to produce 6,000 units.

Depreciation per unit = ($70,000−10,000) / 6,000 = $10

10 × actual production will give the depreciation cost of the current year.

The table below illustrates the units-of-production depreciation schedule of the asset.

Book value at beginning of year	Units of production	Depreciation cost per unit	Depreciation expense	Accumulated depreciation	Book value at end of year
$70,000 (original cost)	1,000	$10	$10,000	$10,000	$60,000
$60,000	1,100	$10	$11,000	$21,000	$49,000
$49,000	1,200	$10	$12,000	$33,000	$37,000
$37,000	1,300	$10	$13,000	$46,000	$24,000
$24,000	1,400	$10	$14,000	$60,000	$10,000 (scrap value)

Depreciation stops when book value is equal to the scrap value of the asset. In the end, the sum of accumulated depreciation and scrap value equals the original cost.

Units of time depreciation

Units of time depreciation is similar to units of production, and is used for depreciation equipment used in mine or natural resource exploration, or cases where the amount the asset is used is not linear year to year.

A simple example can be given for construction companies, where some equipment is used only for some specific purpose. Depending on the number of projects, the equipment will be used and depreciation charged accordingly.

Composite depreciation method

The composite method is applied to a collection of assets that are not similar, and have different service lives. For example, computers and printers are not similar, but both are part of the office equipment. Depreciation on all assets is determined by using the straight-line-depreciation method.

Asset	Historical cost	Salvage value	Depreciable cost	Life	Depreciation per year
Computers	$5,500	$500	$5,000	5	$1,000
Printers	$1,000	$100	$ 900	3	$ 300
Total	$ 6,500	$600	$5,900	4.5	$1,300

Composite life equals the total depreciable cost divided by the total depreciation per year. $5,900 / $1,300 = 4.5 years.

Composite depreciation rate equals depreciation per year divided by total historical cost. $1,300 / $6,500 = 0.20 = 20%

Depreciation expense equals the composite depreciation rate times the balance in the asset account (historical cost). (0.20 * $6,500) $1,300. Debit depreciation expense and credit accumulated depreciation.

When an asset is sold, debit cash for the amount received and credit the asset account for its original cost. Debit the difference between the two to accumulated depreciation. Under the composite method no gain or loss is recognized on the sale of an asset. Theoretically, this makes sense because the gains and losses from assets sold before and after the composite life will average themselves out.

Depletion Method of Depreciation:

Learning Objectives:

1.      What is depletion method of depreciation? Explain with example.

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:

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.

Intangible Assets Subject to Amortization Allocating the cost of intangible assets is called amortization cost allocation for intangibles.. For an intangible asset with a finite useful life, we allocate its capitalized cost less any estimated residual value to periods in which the asset is expected to contribute to the company's revenue-generating activities. This requires that we determine the asset's useful life, its amortization base (cost less estimated residual value), and the appropriate allocation method, similar to our depreciating tangible assets.