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CHAPTER             Depreciation
                      CHAPTER

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                                  MEANING OF KEY TERMS USED IN THE CHAPTER

                       1.  Depreciation           Depreciation means fall in the value of tangible asset because of:
                                                    (i)  usage, i.e., wear and tear;   (ii)  efflux of time;
                                                   (iii)  obsolescence; or         (iv)  accident.
                       2.  Depletion              The term ‘Depletion’ is associated with extraction of natural resources like
                                                  quarries, mines, etc.
                       3.  Amortisation           Amortisation means writing off intangible assets over their
                                                  estimated useful life.
                       4.  Obsolescence           It refers to decline in the economic value of the asset due to innovation or
                                                  improved technique, change in taste or fashion or inadequacy of existing
                                                  asset due to improved demand.
                       5.  Original or Historical Cost   It means cost incurred to acquire the asset up to the point it is ready for
                                                  use. It is the basis for depreciation.
                       6.  Residual Value         It is the estimated sale value of the asset at the end of its useful
                                                  economic life.
                       7.  Accumulated            It is a method of recording depreciation under which depreciation is
                        Depreciation              credited to  ‘Provision for Depreciation Account or Accumulated
                                                  Depreciation Account’. It is the total depreciation expenses already
                                                  charged as expense in different accounting periods.
                       8.  Straight Line Method    It is a method of providing depreciation under which net cost of the asset
                                                  (Historical Cost – Realisable Value) is written off equally over the useful
                                                  life of the asset.
                       9.  Written Down Value     It is a method of providing depreciation under which a percentage of
                        Method                    depreciation  is applied  every  year  on  the  book  value  (i.e.,  cost  less
                                                  depreciation).

                                                  CHAPTER SUMMARY
                       Depreciation is the cost of fixed asset that has expired because of its usage and/or with
                       efflux of time.
                       Causes of Depreciation are:
                       (i) wear and tear, (ii) efflux of time, (iii) obsolescence and (iv) accident.
                       Objectives of providing Depreciation are to:
                         (i)  ascertain correct profit or loss.
                        (ii)  show a true and fair view of the financial position.
                        (iii)  show the assets at their correct values.
                        (iv)  determine the correct cost of production.
                         (v)  retain funds out of profit, for replacement.
                        (vi)  comply with legal provisions.
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