Depreciation is the diminution in the financial value of an asset owing towear and tear, efflux of time, obsolescence or similar causes.Depreciation is a permanent continuing and gradual shrinkage in the valueof a fixed asset. It is also defined as the permanent and continuousdiminution in the quality, quantity or the value of assets.The gradual decrease in the value of an asset because of any cause.The amount of depreciation is charged on the basis of cost of machine,life of the assets and the cost of replacement.TYPES OF DEPRECIATION:-(1) STRAIGHT LINE METHOD:
Straight-line depreciation is the simplest and most-often-used technique, in which the company estimates the salvage value of the asset at the end of the period during which it will be used to generate revenues (useful life) and will expense a portionof
in equal increments over that period. The salvage value is an estimate of the valueof the asset at the time it will be sold or disposed of; it may be zero or even negative. Salvagevalue is also known as scrap value or residual value
(2) DOUBLE DECLINING DEPRECIATION METHOD:
Depreciationmethods that provide for a higher depreciation charge in the first year of an asset's life andgradually decreasing charges in subsequent years are called
accelerated depreciation methods
.This may be a more realistic reflection of an asset's actual expected benefit from the use of theasset: many assets are most useful when they are new. One popular accelerated method is the
. Under this method the Book Value is multiplied by a fixed rate.
(3) WDV OR DIMINISHING METHOD:
Written down value
,applicable tomachines that have high rates of depreciation in the initial year or two, and later taper it e.g.a car, is a usable method.
Under this method, depreciation is charged at a fixed rate every year,ON THE REDUCING BALANCE
A certain percentage is applied to theprevious year’s book value, to arrive at the current year’s depreciation/ bookvalue,
WHICH SHOWS A DECLINING BALANCE, WEIGHTED FOR EARLIER YEARS, AND LOWER AND LOWER FOR LATER YEARS, as themachine grows older.
Accelerates depreciation taken in early years. Reduces the amount taken inlater years. Ignores salvage value; starts with depreciable base = asset cost.