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C H A P T E R

Depreciation

MEANING OF KEY TERMS USED IN THE CHAPTER

1. Depreciation Depreciation means fall in the value of an asset because of:
(i) usage, i.e., wear and tear; (ii) efflux of time;
(iii) obsolescence; or (iv) accident.
The term ‘Depreciation’ is associated with tangible fixed assets.
2. Depletion The term ‘Depletion’ is associated with extraction of natural resources like
quarries, mines, etc.
3. Amortisation The term is associated with writing off intangible assets.
4. Obsolescence It means decline in the economic value of the assets due to innovation or
improved technology, 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. Useful Life Useful life of the asset means the period for which the asset can be used
productively by the enterprise.
7. Residual Value It is the estimated sale value of the asset at the end of its useful economic
life.
8. Accumulated Depreciation It is the total depreciation already charged as expense in different
accounting periods. In other words, it is total depreciation provided on a
fixed asset till date.
9. 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.
10. 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 till date.
CHAPTER SUMMARY

• Depreciation is the cost of fixed asset that has expired because of its usage and/or efflux of time.
• Causes of Depreciation are (i) wear and tear, (ii) efflux of time, (iii) obsolescence and (iv) accidents.
• 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 fixed assets at their correct values. (iv) retain funds out of profits for replacement.
(v) compliance of legal provisions.
• Depreciation can be recorded either (i) by crediting it to the respective Asset Account or (ii) by crediting
it to Provision for Depreciation Account or Accumulated Depreciation Account.
• Depreciation can be computed either as a (i) fixed percentage on original cost known as Straight Line
Method or (ii) fixed percentage on diminishing balance known as Written Down Value Method.
• Depreciation reduces the book value and not the market value of the depreciable fixed asset.