Published by www.lecturesheet.com Meaning of Depreciation:- Generally Depreciation is one kind of expenses . The word depreciation comes from a Latin word Depretium. Here de means decline and pretium means price. So Depreciation means decrease in the value of fixed or capital assets. Not having fixed system, different organizations use different methods for calculating deprecation. Deprecation is a guessed expense. For this reason it is said that deprecation is a process of cost allocation, not a process of assets valuation. Deprecation is charged on fixed assets such as building,equipments. Kieso said “Depreciation is the allocation of the cost of plant asset to expense over its useful life in a rational and systematic manner” “ Deprecation is the systematic allocation of the depreciable amount of an asset over its useful life.” IFRS
Depreciation vs Fluctuation:- Depreciation Fluctuation Deprecation is due to Fluctuation is due to internal causes. external causes It is charge against the It is not charge against profit of the year. the profit of the year. It is always means It means either increase decrease in the value of or decrease in the value the asset. of an asset. Market condition not Market condition affects affects the deprecation the fluctuation because it because it is permanent is temporary rise on self. decrease On the other hand it is It is always change on always change on fixed assets current assets
Objectives/Why providing depreciation?Determination of actual profit or loss:- The value of fixedassets reduces for gradual use of it with a view to earningprofit. It is one kind of cost. So, to determine correct profit orloss providing depreciation it is important.Ascertainment of actual cost of production:- Fixed assets areused in this product as a cost. Here fixed assets are declined. Sowithout counting depreciation we cannot determine totalproduction cost.Prevention of payment of dividend from the capital:-If wecalculate the profit and loss account without postingdeprecation as a debit, the calculated profit must be more thenthe actual profit. If we give dividend from this inflated profit, apart of capital is distributed among the owners. It is prohibitedfor the company.
Determination of correct value of asset:-If we want to determine the correct value of asset at the end of the accounting period, we have to subtract the depreciation of this year from the primary value of the asset.• Exhibition of true and fair view:-The cost of the fixed asset is declined by the gradual use of it. If we show this value in the financial statement without consideration of this depreciation, the actual financial condition of the enterprise is not publication• Maintenance of Capital:-After using assets we can not get back the same amount of assets. So every year depreciation is posted to the debit side of the profit and loss account with a view to getting back the actual amount. Reduction of tax Liabilities:-Net income is reduced as a result of providing depreciation. So the amount of tax is reduced. Replace the assets:-The deprecation amount used to replace the asset when the asset is scrapped
Causes of depreciation:- Wear and tear Effluxion of time Obsolescence Exhaustion Effects of the weather and other elements
Measure of depreciation:- The original cost of the asset The addition of asset during the year, taking into consideration the dates on which these additions were made for the purpose of calculations. The interest that could be earned if the sum spend in the purchase of the asset had been invested outside. The estimated efficiency of the life of the asset. Different methods that may be used to caculation
ContinueThe scrap, break-up or the residual value ofthe asset.Obsolescence, i.e., the change of the assetgoing out of fashion.Deprecation should be provided accordingto the income tax Act and companies Act.Question no 61 and 64 for case study