DEPRECIATION

INTRODUCTION:
Generally, the term ‘depreciation’ is used to denote ‘decrease in
value’. But in accounting, ‘Depreciation’ refers ‘Permanent and
continuous decrease in the book value of a fixed asset due to
various reasons.’
 Fixed Asset and
 Current Asset:
Fixed Assets are the asset which are used in the business to
derive benefits for a longer period of time; usually more than
one accounting period.
Usage of fixed assets to generate periodic revenue leads to
reduction in their earning and production capacity periodically
(due to various causes) which results decrease in the cost of
fixed asset period after period. So the decrease or expired
proportion of cost of fixed asset need to be charged as cost
against periodic revenue. Such an appropriate expired
proportion of cost of fixed assets is termed as Depreciation.
Broadly, the term depreciation also covers Depletion,
Amortization, and Obsolescence.
 Depletion refers to the physical deterioration by the
exhaustion of natural resources (ore-deposits in mines, oil
wells, timber stands etc.)
 Amortization refers to the economic deterioration by the
expiration of intangible assets (Patents, Copyrights,
Goodwill etc.)
 Obsolescence refers to the economic deterioration by (a)
invention of improved technique or equipment (b) Market
decline due to change in taste and fashion etc.
Causes of Depreciation
 The causes of depreciation may be internal or external. The
internal causes arises from operation of any cause natural to
or inherent in the asset itself. External causes arise from the
operation of forces outside the business.
1.Internal causes
a.Wear and tear: wear and tear is an important cause of
depreciation in case of tangible fixed asset. It is due to
use of the asset
b.Disuse: When a machine is kept continuously idle, it
becomes potentially less useful.
c. Maintenance: The value of machine deteriorates
rapidly because of lack of proper maintenance.
d.Depletion: already explained ABOVE
e.Accidents: it means if an asset meets with an accident
the value of asset may go down
2.External causes
a.Obsolescence: Already explained above.
b.Effluxion of time: When assets are exposed to forces
of nature, like weather, wind, rain etc., the value of
such assets may decrease even if they are not put in to
any use.
c. Time Factor: Lease, copy-right, patents are acquired
for a fixed period of time. On the expiry of the fixed
period of time, the assets cease to exist.

Methods of Depreciation
1.Straight line method
2.Written down value method
3.Sum of years of digits method
4.Machine hour method/ service hour method
5.Production units method
6.Annuity method
7.Sinking fund method
8.Depletion method