WHAT IS DEPRECIATION?

DEPRECIATION: The word depreciation is derived from the Latin word Depretium. ‘De’ means decline and pretium means price. It means decline in value of asset.

It is the permanent and gradual decrease in the quality or quantity or value of an asset every year like plant and machinery, buildings,furniture etc. It arises due to the following causes:

  1. Wear and tear by constant use
  2. Obsolescence
  3. Effluxion of time
  4. Structural defects
  5. Non-usage of asset
  6. Negligence

A Businessman, in the course of his business,acquires certain fixed assets like Land,Buildings,Machinery,Furniture,Equipment etc. To carry on business to earn profit. These are acquired by the trader not with a view for resale or conversion but for the purpose of carrying on business.

Definition:

Depreciation is the gradual decrease in the value of asset from any cause.  –Carter.

Depreciation may be defined as the permanent and continuous deminution in the quality,quantity or value of an asset.-Pickles.

Calculation of rate of Depreciation:

depreciation

Objectives:

  1. To ascertain the true profit.
  2. To provide necessary funds for its replacement.
  3. To show real value of fixed assets.
  4. To keep capital Intact.
  5. To follow legal provisions.

Methods of charging-Depreciation:

There are several methods for charging depreciation. The following are the important methods of providing depreciation.

  1. Fixed instalment Method.
  2. Diminising balance method.
  3. Annuity method.
  4. Depreciation fund method.
  5. Insurance method.
  6. Revalution method.
  7. depletion method.
  8. Mechine rate hour method.

1. Annuity method:

Annuity method deals with the effect of cost of capital in depreciation calculation. It makes treatment more explicit by showing the interest payment in the P&L A/c.

Under this system the capital sum is assumed to earn a certain rate of interest. The assets are, therefore, charged with interest along with actual payment; interest is calculated on the debit balance of the assets on the commencement of the year.