What is Depreciation? Definition, nature, cause and methods.

ACCOUNTING FOR DEPRECIATION 

The word Depreciation is derived from a latin word "DEPRETIUM" where "De " means decline and " pretium " means price.

INTRODUCTION :-

A business or concern holds fixed assets for regular use and not for resale. The capability of a fixed asset to render service cannot be unlimited. Except land ,all other fixed assets have a limited useful life. The benefit of a fixed asset is received throughout its useful life. 

                          DEPRECIATION means a gradual decrease in the value of an asset due to normal wear and tear, obsolescence etc. In short ,Depreciation means the gradual diminution, loss or shrinkage in the utility value of an asset to due to wear and tear in use, effluxion of time or introduction of technology inthe market. 

https://brijendranathdas.blogspot.com/2019/06/what-is-accounting-meaning-and.html?m=1

MEANING :-

The word Depreciation is derived from a latin word "DEPRETIUM" where "De " means decline and " pretium " means price.thus ,the word Depreciation stands for Decline in the value of an asset. 

                         Any continuous and gradual decrease in the value of fixed asset due to their use or any other reason is called DEPRECIATION. 

DEFINITION:-

Depreciation is a decline in the book value of depriciable asset during the estimated useful life of the asset . It may be due wear and tear, effluxion of time, obsolescence, depletion ect. 

                      It is a non cash but operating expenses. However the land is not subject to depreciation. 

INDIAN ACCOUNTING STANDARD (AS 6) states that Depreciation is allocated so as to charge a fair proportion of the depriciable amount in each accounting period during the ecpected useful life of the asset. 

NATURE OF DEPRICIATION :- 

Depriciation is a term applicable in case of plant, building, equipment, furniture, fixtures, vehicle, tools etc. These long term or fixed assets have a limited useful life. ie.-They will provide services to the entity over a limited number of future accounting periods.

                                    Depriciation implies gradual decrease in the value of an asset due to normal wear and tear ,obsolescence, depletion etc. It makes a part of the cost of assets chargeable as an expense in profit and loss account of the accounting period. 

CAUSE OF DEPRICIATION :-

A.  INTERNAL CAUSE 

   i.Wear and Tear 

   ii. Depletion (or Exhaustion) 

B. External or Economic cause 

   i. Obsolescence 

   ii. Inadequacy 

C. Time element

D.Abnormal occurrence

METHODS OF DEPRICIATION :-

CAPITAL /SOURCE OF FUND 

i. Sinking fund method 

ii. Annuity method 

iii. Insurance policy method 

TIME BASE 

i. Fixed installment method 

ii. Reducing Balance method 

iii. Sum of years'Digit method 

iv. Double Declining method 

Use Base 

i. Working Hours method 

ii. Mileage method

iii. Deplition Service Hour method unit method 

Price Base 

i. Revaluation method 

ii. Repairs provision method 

https://brijendranathdas.blogspot.com/2019/06/basic-accounting-terms.html?m=1

CHARACTERISTICS OF DEP'n. 

i. Dep'n is a non cash expense 

ii.Dep'n maybbe physical or functional 

iii. Dep'n is charged in respect of fixed assets only, accept on land .

iv. It is charged to the revenue to find out the net profit or net loss. 

v. The total dep'n of an asset cannot exceeds its depriciable value. (cost -scrap value)

vi. The current asset is beyond the purview of charging dep'n..