Depreciation

Accounting
Presented by
Neelabh Kumar

Depreciation

Depreciation is the permanent and continuous

decrease in the book value of a fixed asset due
to use, lapse of time, obsolescence, expiration
of legal rights or any other cause.

Characteristics of Depreciation

It is related to fixed assets only.

It is a fall in the book value of an asset.
The fall in the book value of an asset is due to the use
of the asset in business operations, effluxion of time,
obsolescence, and expiration of legal rights or any
other cause.
It is a permanent decrease in the book value of an asset.
It is a continuous decrease in the book value of an
asset.

Depreciation, Depletion and Amortization

Depreciation is concerned with charging the cost of

man made fixed assets to operation.
Depletion referred to the process of removing an
available but irreplaceable resource such as extracting
coal from a coal miner or oil out of an oil well.
Amortization-The process of writing off intangible
assets is termed as amortization. The intangible assets
like patents, copyrights, leaseholds and goodwill are
recorded at cost in the books of account,

Meaning of Depreciation Accounting

Depreciation Accounting is a system of
accounting which aims to distribute
cost or the basic value of tangible
capital assets less salvage (if any),
over the estimated useful life of the
unit (which may be group of assets) in
a systematic and rational manner. It is
a process of allocation and not of
valuation.

CAUSES OF DEPRECIATION
Physical wear and tear : When the fixed assets are put to use, the value of such
assets may decrease. Such decrease in the value of assets is said to be due to physical
wear and tear.
With the passage of time : When the assets are exposed to the forces of nature like
whether, winds, rains, etc., the value of such assets may decrease even if they are not
put to any use.
Changes in economic environment : The value of an asset may decrease due to
decrease in the demand of the asset. The demand of the asset may decrease due to
technological changes, changes in the habits of consumers etc.
Expiration of legal rights : When the use of an asset (e.g., patents, leases) is
governed by the time bound arrangement, the value of such assets may decrease with
the passage of time.

NEED FOR PROVIDING DEPRECIATION

To ascertain true results of operations : For proper matching of costs with
revenues, it is necessary to charge the depreciation (cost) against income
(revenue) in each accounting period.
To present true and fair view of the financial position : For presenting a true
and fair view of the financial position, it is necessary to charge the depreciation.
To ascertain the true cost of production : For ascertaining the cost of
production, it is necessary to charge depreciation as an item of cost of production.
To comply with legal requirements: In case of companies, it is compulsory to
charge depreciation on fixed assets before it declares dividend [Sec. 205(1) of the
Companies Act, 1956].
To accumulate funds for replacement of assets : A portion of profits is set aside
in the form of depreciation and accumulated each year to provide a definite
amount at a certain future date for the specific purpose of replacement of the asset
at the end of its useful life.

BASIC ELEMENTS OF DEPRECIATION

Cost of the asset : The knowledge about the cost of the
asset is very essential for determining the amount of
depreciation to be charged to the profit and loss account.
Estimated life of the asset : Estimated life generally means
that for how many years or hours an asset could be used in
business with ordinary repairs for generating revenues.
Scrap. Value of the Asset : The salvage value of the asset
is that value which is estimated to be realised on account of
the sale of the asset at the end of its useful life.

METHODS OF CALCULATING
DEPRECIATION
Straight Line Method : This is also known as
fixed instalment method. Under this method
the depreciation is charged on the uniform
basis year after year.

Diminishing Balance method

Written Down Value Method : This is also known as
Diminishing Balance method. Under the diminishing
balance method depreciation is charged at fixed rate on
the reducing balance (i.e., cost less depreciation) every
year. Thus, the amount of depreciation goes on
decreasing every year.
Under this method also the amount of depreciation is
transferred to profit and loss account in each of the year
and in the balance sheet the asset is shown at book
value after reducing depreciation from it.

Thank-You