Meaning of depreciation-
Various types of Assets are used in the business, Some of them are permanent in nature, such as building, machine, furniture, plant, typewriter, computer, etc. These Assets are used continuously for many years in business.
Due to the continuous use of these assets, wear and tear, expected obsolescence, exhaustion of the original substance, and falling market value permanently, the gradual and permanent decline in the value of these assets is called depreciation.
Definition of depreciation-
According to R.N. Carter, “Depreciation is the gradual and permanent decrease in the value of an asset from any cause”
According to J.R. Batliboi,“Depreciation means permanent decline in the value of assets due to wear and tear or from any other cause.”
According to R.G. Williams,“Depreciation may be defined as a gradual deterioration in value of assets due to use.”
“The gradual and permanent decrease in the value of fixed assets due to normal wear and tear; passes of time and expected obsolescence in technology, known as depreciation”.
In other words, the process of allocation of the cost of a fixed asset over its useful life is known as depreciation.
Causes of depreciation –
- Continuous use of assets
- Due to wear and tear of assets
- Due to Accidents
- Due to the obsolescence of assets (change in technology)
- Because of the elimination of the original substance
- Due to market price falling permanently
- passes of time
Objectives of Charging depreciation –
- To determine correct net profit/ loss
- For preventing a shortage of capital
- To show the true and fair value of assets in the balance sheet.
- The facility in replacement of new Assets/property
- To avail income tax exemption
- For ascertaining the true cost of production
- To meet the legal requirements
Things to keep in mind while calculating depreciation-:
1. The cost price of Assets- Cost price does not mean only the purchase price of the property but also includes expenses for bringing and setting up of the property.
For example- A machine purchased at Rs. 50,000, Carriage paid on machinery Rs. 5,000 and Rs. 10,000 in setting up, the cost of the machine will be Rs. 65,000.
2. Estimated useful life of Assets: The amount of time a property is likely to run is called the estimated life span of the property/Assets.
3. Residue value or residual value- The value at which a property or asset is likely to be sold after a certain period is called the residual value/scrap value of the property.
4 . Obsolescence of the assets…….
5. Tax provision……….
6. Accounting law provision……….