Life span of an asset to a business rests, primarily, on the purpose of its acquisition and nature. An item acquired for immediate consumption or sale is a short lived asset, and that which is meant for prolonged use, is long lived asset, though both produce revenues. Except for land, all other fixed assets have limited span of life. When a fixed asset is acquired, it is recorded in the books at its acquisition cost i.e the price paid to acquire it. A portion of the cost should be charged against profits as an expense in each of the accounting periods in which the asset is gainfully used. This accounting process of gradually converting unexpired cost of fixed asset into expenses over a series of accounting periods is called DEPRECIATION. Though depreciation is a measure of reduction in the use value of an asset, it does not refer to physical deterioration or decrease in the market value.
DEFINITION:- "DEPRECIATION IS THE PERMANENT AND CONTINUOUS DIMINUTION IN THE QUALITY, QUANTITY OR VALUE OF AN ASSET" WILLIAM PICKLES.
DISCUSSION: 56 ROHIT DHIMAN (A)
To start with here are some of the Characteristics of depreciation:
1. Depreciation is a non-cash expense.
2. Depreciation may be physical or functional.
3. Depreciation is a process of allocation of cost and not of valuation of fixed assets.
4. Depreciation is charged in respect of fixed assets only.
5. Depreciation is a continuous fall in the utility of a fixed asset till the end of its useful life.
6. It is charged to the revenue to find out the net profit of the
business.
7. Depreciation once charged can not be recouped afterwards.
8. Depreciation does not depend on the fluctuations in the market value of an asset.
METHODS OF CHARGING DEPRECIATION:
1.FIXED INSTALMENT METHOD:- under this method, a fixed proportion of original cost of the asset is written off annually so that by the time asset is worn out, its value in the books is reduced to zero or residual value. This method is also known as 'Straight Line Method' or 'Original Cost Method'.
2.DIMINISHING BALANCE METHOD:- under this method, a fixed rate or %age of depreciation is charged each year on the diminishing value of asset till the amount is reduced to scrap value. Though the %age at which depreciation is charged remains fixed, the amount of depreciation goes on decreasing year after year.
Some other methods are:-
1.Sum of the years digit method
2.Annuity method
3.Sinking fund method
4.Insurance policy method
5.Machine hour rate method
6.Depletion method
7.Revaluation method
8.Mileage method
CONCLUSION: 183 VIKAS KASHYAP (C)
In the end I would like to conclude by saying that depreciation is defined as the reduction in the value of a product arising from the passage of time due to use or abuse, wear and tear. Depreciation is not a method of valuation but of cost allocation. This cost allocation can be based on a number of factors, but it is always related to the estimated period of time the product can generate revenues for the company. Depreciation expense is the amount of cost allocation within an accounting period. Only items that lose useful value overtime can be depreciated. That said, land can't be depreciated because it can always be used for a purpose.
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