Meaning of Depreciation
The word Depreciation means decrease in the value of fixed assets from its actual value. According to Accounting standards of Indian charted Accountant of India (ICAI) deprecation is a restricted to decline the value of tangible assets and a measure of wearing out, consumption, or other value of appreciable asset.
“Depreciation refers to the process of estimating and recording the periodic charges to expense due to expiration of the usefulness of a capital asset”– Malchman and Slavin.
Depreciation is defined as “a permanent, continuing and gradual shrinkage in the book value of a fixed asset due to use, wear and tear, obsolescence or efflux ion of time.”
The Depreciation is charged due to
- Passage of Time
- Wear and Tear
- Outdated technology
- Other factors.
Features of Depreciation
- Decrease in value of fixed assets
- Continuous process
- Loss should be constant
Objectives or Need of depreciation
- To determines net profit or loss: Depreciation helps in determines net profit or loss due to the examination of books of accounts.
- To ascertain true profits: Depreciation is the decrease in the value of fixed assets and it helps to ascertain true profits of the business organization
- To examine assets proper value: Depreciation is a process which helps in ascertaining fixed assets value and provides proper value of assets which are used in organization.
- To ascertain true and fair value of financial position: Depreciation helps in ascertain the true and fair value of financial position of business by reduction of value of fixed assets.
Causes of Depreciation
- By constant use: The depreciation is charged when the asset is constantly used and its value started reduced.
- By Expiry of time: Depreciation on fixed assets is charged when the time of fixed assets is passed.
- By obsolesce: The old assets will become obsolete due to new inventions, improved techniques and technological advancements.
- By abnormal factor: Depreciation may be charged due to expiry, accident, or any other damage.
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