Depreciation refers to the gradual and permanent decrease in the value of fixed assets over time due to causes like wear and tear, depletion, obsolescence, and accidents. It is calculated through methods like straight line and diminishing balance that allocate the cost of an asset over its useful life. Recording depreciation through adjusting entries debits the depreciation expense account and credits the asset account, while the closing entry reverses this to debit profit and loss and credit the accumulated depreciation account. The objective is to ascertain accurate profits, costs, and asset values.

1. DEPRECIATION
DEFINE THE TERM DEPRECIATION.
Depreciation means gradual and permanent decrease in the value of fixed asset by any cause
WHAT ARE THE CAUSES OF DEPRECIATION?
1. Internal Causes
 Wear & Tear
 Depletion
2. External Causes
 Obsolescence
 Accident
 Efflux of time
DEFINE FIXED ASSETS.
An asset that is not consumed or sold during the normal course of business, such as Building,
Machinery etc
DEFINE TANGIBLE ASSETS.
Assets which have physical existence e. g. Furniture, Building, Machinery etc
DEFINE INTANGIBLE ASSETS.
Assets which have no physical existence like Goodwill, Trade Mark etc
DEFINE CURRENT ASSETS.
Asset which can be converted into cash within one year are called current asset e.g. Cash, Bank,
Debtors etc
DEFINE WASTING ASSETS.
Natural resource such as coal, gas, oil that diminishes in value due to depletion is called wasting
assets.
DEFINE AMORTIZATION.
Decrease in the value of intangible fixed assets is called amortization e.g. Trade Mark, Goodwill
etc
DEFINE DEPLETION.
Decrease in the value of wasting assets is called depletion e.g. Mines, Oil wells etc
DEFINE COST PRICE OF AN ASSET.
It includes all expenses e.g. purchase price, installation and erection charges etc
Cost Price = Purchase Price + All Capitalized Expenditures
DEFINE WRITTEN DOWN VALUE.
Amount yet to b allocated for depreciation is called written down value
PUNJAB COLLEGE OF COMMERCE PROF. HAFIZ MUHAMMAD NAWAZ PAGE 1

2. DEPRECIATION
DEFINE ACCUMULATED DEPRECIATION.
The total depreciation charged in different accounting period is called accumulated depreciation.
or
Sum of the depreciations of all the accounting period is called accumulated depreciation
DEFINE SCRAP / BREAKUP / SALVAGE / RESIDUAL VALUE.
The price at which the asset will be sold at the end of its working life is called scrape value.
DEFINE BOOK VALUE OF ASSET.
Value according to the books of account is called book value of asset.
Book value = Cost Price of an Assets – Accumulated Depreciation
DEFINE WEAR AND TEAR.
Change in shape of assets due to use in business is called wear and tear.
DEFINE STRAIGHT LINE METHOD.
A method of depreciation in which the amount of depreciation remains same every year is called
straight line method.
WHAT IS THE FORMULA FOR THE CALCULATION OF ANNUAL DEPRECIATION
UNDER STRAIGHT LINE METHOD?
Cost – Scrape Value
Annual Depreciation =
Estimated life
WHAT IS THE FORMULA FOR THE CALCULATION OF RATE OF DEPRECIATION
UNDER DIMINISHING BALANCE METHOD?
R = [ 1 - ( s / c ) ] 1/n
Where
R = Rate of depreciation
S = Scrape Value
C = Cost price
N = Life / Number of year
DEFINE DIMINISHING BALANCE METHOD / REDUCING BALANCE METHOD /
REDUCING INSTALLMENT METHOD / WRITTEN DOWN VALUE METHOD.
Under this method depreciation is charged with fixed rate on book value of asset and amount of
depreciation decrease every year.
NAME OF TWO COMMON METHOD USED IN DEPRECIATION
The common used method of depreciation is as follows:
 Straight line method
 Diminishing balance method
PUNJAB COLLEGE OF COMMERCE PROF. HAFIZ MUHAMMAD NAWAZ PAGE 2

3. DEPRECIATION
WHAT IS THE ENTRY OF DEPRECIATION / ADJUSTING ENTRY OF
DEPRECIATION?
DATE PARTICULARS L.F DEBIT (Rs.) CREDIT (Rs.)
Depreciation Account XXX
To Asset Account XXX
WHAT IS THE CLOSING ENTRY OF DEPRECIATION?
DATE PARTICULARS L.F DEBIT (Rs.) CREDIT (Rs.)
Profit & Loss Account XXX
To Depreciation Account XXX
WHAT IS THE OBJECT OF PROVIDING DEPRECIATION?
The objects of providing depreciation are:
 To find out the net profit or loss
 To ascertain the cost of production
 To ascertain the true value of assets
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