Depreciation is a measure of the
wearing out, consumption or other loss
of value of a depreciable asset arising
from use, efflux ion of time or
obsolescence through technology and
Depreciation is allocated so as to
charge a fair proportion of the
depreciable amount in each
accounting period during the
expected useful life of the asset.
• To ascertain the correct cost of
Depreciation should be taken into
consideration for calculating the cost of
production. if it is not cost of production,
•To will not be correct.fair view of the
It show a true and
Depreciation, if not charged, would result
in assets being stated at a higher value. As
a result of this the positional statement
would not present a true and fair view of
the financial positional
• To ascertain the correct profit and loss:
Depreciation is a loss. So Unless it is
considered like all other expenses and
losses, true profit or loss cannot be
ascertained. In other words, depreciation
must be considered in order to into out true
profit or loss of a business.
1. EFFLUX OF TIME
The value of asset may decrease due to
the passage of time even if it is not
in use. There are some intangible
fixed assets like copyright, patent
right, and lease hold premises which
decrease its value as time elapse
Assets may be destroyed by abnormal
reasons such as fire, earthquake, flood
etc. In such a case the destroyed asset
must be written off as loss and a new
3.WEAR AND TEAR
Wear and tear refer to a decline in the
efficiency of asset due to its constant
use. When an asset losses its
efficiency, its value goes down and
depreciation arises. This is true in case
of tangible assets like plant and
machinery, building, furniture, tools and
equipment used in the factory.
Changes in fashion are external factors
which are responsible for throwing out
of assets even if those are in good
condition. For example black and white
televisions have become obsolete with
the introduction of color TVs, the users
have discarded black and white TVs
although they are in good condition.
Such as loss on account of new invention
or changed fashions is termed as
Straight line method depreciates cost
evenly through out the useful life of the
fixed asset. Straight line depreciation
is calculated as follows:
(Cost - Residual Value) / Useful Life
Cost includes the initial and any
subsequent capital expenditure.
Residual Value is the estimated scrap
value at the end of the useful life of the
asset. As the residual value is expected
to be recovered at the end of an asset's
useful life, there is no need to charge
the portion of cost equaling the residual
Useful Life is the estimated time period
an asset is expected to be used from
the time it is available for use to the
time of its disposal or termination of
ITS MERITS …
It is a simple method of calculating the
In this method ,assets can be
depreciated up to the estimated scrap
In this method, it is easy to know the
amount of depreciation.
Every year the profit and loss account is
debited by the same amount of
depreciation, so there is the same
effect on profit and loss account every
There is no arrangement of interest
on capital invested in assets in this
With the passage of time, work
efficiency of assets decreases and
repair expenses increases.
Sometimes in this method, the book
value of assets become nil, still the
asset are used in the business.
Diminishing balance method is also known
as written down value
method or reducing installment method.
Under this method the asset is
depreciated at fixed percentage
calculated on the debit balance of the
asset which is diminished year after
year on account of depreciation.
There is same weightage on profit and
loss account of depreciation and repair
On the expansion and increase in assets
the depreciation can be computed easily
by this method.
This method is accepted under the
income tax act.
In this method ,the value of assets can
never be zero.
It is difficult task to ascertain the
proper rate of depreciation
In this method also, there is no
provision of interest on capital invested
in use of assets.