What Is Unabsorbed Depreciation?

Are you curious to know what is unabsorbed depreciation? You have come to the right place as I am going to tell you everything about unabsorbed depreciation in a very simple explanation. Without further discussion let’s begin to know what is unabsorbed depreciation?

What Is Unabsorbed Depreciation?

Depreciation is the systematic allocation of the cost of a fixed asset over its useful life. It is a non-cash expense that is recorded in the income statement and reduces the value of the asset on the balance sheet. Unabsorbed depreciation occurs when the total amount of depreciation charged in the income statement is greater than the taxable depreciation allowed by the tax authorities.

In other words, unabsorbed depreciation arises when the tax authorities do not allow the full amount of depreciation charged in the income statement as a deduction for tax purposes. This can occur due to various reasons, such as differences in the useful life of an asset according to tax laws and accounting standards, or due to the application of different depreciation methods for tax and accounting purposes.

Unabsorbed depreciation can have a significant impact on a company’s tax liability. When the amount of depreciation charged in the income statement exceeds the allowable tax depreciation, the excess amount is carried forward to subsequent years and is available as a deduction against taxable income in those years. This can result in tax savings in future years and can improve a company’s cash flow.

It is important to note that unabsorbed depreciation is not the same as accumulated depreciation. Accumulated depreciation is the total amount of depreciation charged on an asset since its acquisition, while unabsorbed depreciation is the excess amount of depreciation that is not allowed as a deduction for tax purposes.

Conclusion

To summarize, unabsorbed depreciation occurs when the total amount of depreciation charged in the income statement is greater than the taxable depreciation allowed by the tax authorities. It can have a significant impact on a company’s tax liability and cash flow. Understanding the concept of unabsorbed depreciation is important for companies and individuals involved in tax planning and compliance.

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FAQ

What Is An Example Of Unabsorbed Depreciation?

Example: PGBP income before debiting current year depreciation is Rs 1,00,000 and current year depreciation expenditure turns out to be Rs 1,60,000. In this case, depreciation to the extent of Rs 1,00,000 would be debited to P&L A/c and a balance of Rs 60,000 would be referred to as ‘unabsorbed depreciation’.

What Is Unabsorbed Depreciation How Do You Treat It?

Unabsorbed depreciation is the amount of unutilized depreciation which the assessee will not be able to claim as an expense in his income tax returns due to a lack of sufficient profit in the profit & loss account.

What Is The Difference Between Unabsorbed Depreciation And Depreciation?

if the company suffers a loss before claiming depreciation, then the entire amount of depreciation is unabsorbed depreciation. however, if the company suffers a loss as a result of the depreciation amount than a business loss will be nil, and the balance of the depreciation amount will be unabsorbed depreciation.

How Is Unabsorbed Depreciation Written Off?

As per the provisions of section 32(2) of the Income Tax Act, 1961, the unabsorbed depreciation becomes part of the next year’s depreciation allowance and is allowed to be set off as per the provisions of the Income Tax Act, 1961, irrespective of whether the return of the earlier year was filed within the due date or not.

What Is The Difference Between Unabsorbed Depreciation And Business Loss?

if the company suffer a loss before claiming depreciation, than the entire amount of depreciation is unabsorbed depreciation. however, if the company suffers a loss as a result of depreciation amount than business loss will be nil and balance of depreciation amount will unabsorbed depreciation.

What Is Unabsorbed Depreciation With Example?

Example: PGBP income before debiting current year depreciation is Rs 1,00,000 and current year depreciation expenditure turns out to be Rs 1,60,000. In this case, depreciation to the extent of Rs 1,00,000 would be debited to P&L A/c and balance Rs 60,000 would be referred to as ‘unabsorbed depreciation’.