Depreciation

Depreciation means decrease in the values of assets. According to W Pickles, Depreciation is a permanent and continuing diminution in the quality, quantity or the value of an asset, whereas according to JR Batliboi, depreciation represents diminution or loss in the value of the asset due to obsolescence, wear and tear, permanent fall in the market value or effluxion of time. Depreciation is allocated in order to charge a good amount of the depreciable amount in every fiscal period during the predictable useful life of an asset.

Depreciation includes Amortization of assets whose useful life is predetermined. According to the International Accounting Standards Committee, the depreciation is the portion of the depreciable value of the asset over its expected useful life. Depreciation for the accounting period is charged to income either directly or indirectly. Thus, it is clear from the above definition that depreciation is a loss arising on account of circumstances, some of which are known whereas others are not. 

Calculation of Depreciation:

 Depreciation can be calculated if the following items of information are available:

• Cost of the assets includes all expenses incurred for freight for freight, carriage including erection charges.
• Scarp or residual value of the asset. It is estimated which is deducted from the original cost of the asset.
• Effective working life of the asset not the physical life of asset.

Depreciation is equal to cost minus scrap value divided by life of asset or number of years (Depreciation = Cost – Scrap Value / Number of years (life of asset))

Methods for providing depreciation:

Machine Hour Rate Method, Sum of Year’s Digit Method, Production unit method or Depletion method, revaluation method, insurance policy method, depreciation fund method, annuity method, diminishing value method and fixed installment method.

Questionnaire:

• What is depreciation?
• How to calculate depreciation of an asset?