Depreciation Meaning Definition Features Methods

1. ARPITHA L P
1ST M. COM
Under the guidance of Sundar . B . N
Asst. Prof . & course co - ordinator
Post. Graduation Studies in Commerce
G . F . G. C . W . H N Pura

2. CONTENT
1 . DEPRECIATION
1.1 Meaning
1.2 Definition
1.3 Features
1.4 Methods

3. Meaning of Depreciation
The term Depreciation
is derived from the
Latin Word
‘Depretium’ . ‘De’
means ‘Decline’, and
‘Pretium’ means price .
So, Depreciation
means decrease in the
price or value of fixed
assets.

4. DEFINITIONS
 In the words of R. N Carter, “ depreciation is the gradual and permanent decrease in the value
of an assets from any cause”.
 According to W . Pickles “ depreciation is the permanent and continuning diminution in the
quality , quantity or the value of an fixed assets”.

5. FEATURES OF DEPRECIATION
The important feature of depreciation are as follows:
 It is the decrease or decline in the book value of fixed asset.
 It is the permanent , gradual and continuous decrease in the value of fixed asset.
 it is calculated till the end of useful life of the asset.
 It is a non-cash expense and does not involve any cash outflow.
 It is a revenue loss and a permanent charge against the profits of the organization.

6. METHODS OF CALCULATING DEPRECIATION:-
Following are the methods of calculating depreciation:
a) Straight Line Method
b) Written Down Value Method
c) Annuity Method
d) Depreciation Fund Method
e) Insurance Policy Method and
f) Revaluation method

7. STRAIGHT LINE METHOD
This method is also known as ‘ Fixed Installment Method’ , ‘Equal Installment method’ or ‘Original cost method’
Under this method ,a fixed percentage of the original cost is written off every year as annual depreciation.
Depreciation amount can be calculated by using the following formula.
annual Depreciation = Cost of the asset - scrap value Estimated life of the asset
Example:
A company purchased Machinery for Rs 5,00,000 . Its life was estimated to be 10 years, with a scrap value of Rs
10,000 . Find the amount of annual depreciation .
Annual Depreciation = Cost of the asset – scrap value
Estimated life of the asset
= 5,00,000 - 10,000
10 years
= 4,90,000
10
= 49,000

8. WRITTEN DOWN VALUE METHOD
This method is also known as ‘Diminishing Balance Method’ or ‘Reducing Balance Method’ .
Under this method ,depreciation is charged on the book value of the asset. Such book value
keep on reducing by the annual charge of depreciation . So, the amount of depreciation on
asset goes on diminishing year after year.

9. ANNUITY METHOD
Annuity method takes in to account the element of interest on capital outlay and seeks to write
off the value of the asset as well as the interest lost over the life of the asset.
Annuity Accounts to be prepared :-
1. Asset Account
2. Interest Account and
3. Depreciation Account

10. DEPRECIATION FUND METHOD
In this method, the amount of depreciation is calculated with the help of sinking fund table by
eliminating the interest factor which will be earned by the investment made by the
organization . Interest factor is eliminated from the total value of the asset to be written off.

11. INSURANCE POLICY METHOD
This method can be adopted where the repairs and maintenance costs are constant or
decreasing over the life of the asset.

12. REVALUATION METHOD
This method is used where the value of the asset being small in nature in which calculation
depreciation for every unit is a tedious process and defficult to maintain the account for each
and every items

13. Multiple Choice Question:-
1 . Depreciation is a charge on ____
a) Fixed assets b) Current Assets
c) Intangible Assets d)Fictitious Assets
Ans : - a) Fixed Assets
2 . Depreciation is derived from _____ word
a) Greek word b) Italian Word
c) Latin word d) French word
Ans:- c) Latin word
3. Under the Straight line method of providing depreciation , it
a) Increase every year b) Decrease every year
c) Remains constant every year d) None of the above
Ans:- c) Remains constant every year

14. Reference
Topic :- Depreciation
Retrieved from
Siraj Ur Rahaman

15. THANK YOU