The document discusses depreciation, which refers to the decrease in value of fixed assets over time. Depreciation is a method of allocating the cost of fixed assets over their useful lifetime in a systematic manner. It is an expense that is charged against profits each year to reflect the use and aging of fixed assets. Calculating depreciation helps determine actual profit/loss, cost of production, asset value over time, and ensures capital is maintained. Various methods can be used to calculate depreciation based on original cost, additions, estimated useful life, and residual value of the asset.

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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

2. 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

3. Objectives/Why providing depreciation?
Determination of actual profit or loss:- The value of fixed
assets reduces for gradual use of it with a view to earning
profit. It is one kind of cost. So, to determine correct profit or
loss providing depreciation it is important.
Ascertainment of actual cost of production:- Fixed assets are
used in this product as a cost. Here fixed assets are declined. So
without counting depreciation we cannot determine total
production cost.
Prevention of payment of dividend from the capital:-If we
calculate the profit and loss account without posting
deprecation as a debit, the calculated profit must be more then
the actual profit. If we give dividend from this inflated profit, a
part of capital is distributed among the owners. It is prohibited
for the company.

4. 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

5. Causes of depreciation:-
Wear and tear
Effluxion of time
Obsolescence
Exhaustion
Effects of the weather and other
elements

6. 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

7. Continue
The scrap, break-up or the residual value of
the asset.
Obsolescence, i.e., the change of the asset
going out of fashion.
Deprecation should be provided according
to the income tax Act and companies Act.
Question no 61 and 64 for case study