Depreciation refers to the decline in value of fixed assets like machinery over time due to factors such as usage, age, and obsolescence. Fixed assets that are used in a business for more than one year are considered depreciable assets because their value decreases with use. Depreciation is the allocation of the cost of a fixed asset over its useful life and is recorded as an expense on the income statement to match the cost of using the asset with the period it benefits. For example, if a machine costs $100,000 and has a 10 year useful life, $10,000 would be recorded as depreciation expense each year.

1. DEPRECIATION

2. DEFINE THE TERM ‘DEPRECIATION’
THE TERM “DEPRECIATION” MEANS DECLINE IN THE VALUE OF A
FIXED ASSETS DUE TO USE, PASSAGE OF TIME OR OBSOLESCENCE.
IN OTHER WORDS, IF A BUSINESS ENTERPRISE PROCURES A MACHINE
AND USES IT IN PRODUCTION PROCESS THEN THE VALUE OF
MACHINE DECLINES WITH ITS USAGE.
EVEN IF THE MACHINE IS NOT USED IN PRODUCTION PROCESS, WE
CAN NOT EXPECT IT TO REALISE THE SAME SALES PRICE DUE TO THE
PASSAGE OF TIME OR ARRIVAL OF A NEW MODEL (OBSOLESCENCE).

3. DEPRECIABLE ASSET
FIXED ASSET TECHNICALLY REFERRED TO AS
“DEPRECIABLE ASSETS” BECAUSE, WHICH ARE USED IN
BUSINESS FOR MORE THAN ONE ACCOUNTING YEAR
AND TEND TO REDUCE THEIR VALUE ONCE THEY ARE
PUT TO USE.
IT IMPLIES THAT FIXED ASSETS ARE SUBJECT TO
DECLINE IN VALUE AND THIS DECLINE IS TECHNICALLY
REFERRED TO AS DEPRECIATION.

4. DEPRECIATION IS AN EXPENSE ! HOW?
AS AN ACCOUNTING TERM, DEPRECIATION IS THAT PART OF THE
COST OF A FIXED ASSET WHICH HAS EXPIRED ON ACCOUNT OF ITS
USAGE AND/OR LAPSE OF TIME. HENCE, DEPRECIATION IS AN
EXPIRED COST OR EXPENSE, CHARGED AGAINST THE REVENUE OF A
GIVEN ACCOUNTING PERIOD.
FOR EXAMPLE, A MACHINE IS PURCHASED FOR RS.1,00,000 ON APRIL
01, 2014. THE USEFUL LIFE OF THE MACHINE IS ESTIMATED TO BE 10
YEARS.

5. SO IT IMPLIES THAT THE MACHINE CAN BE USED IN THE
PRODUCTION PROCESS FOR NEXT 10 YEARS OF THE
ACCOUNTING PERIOD. SO HERE, RS. 1,00,000 IS A
CAPITAL EXPENDITURE DURING THE YEAR 2014-15. BUT
THE ENTIRE AMOUNT CANNOT BE CHARGED ON P&L A/C
OF 2014-15 BECAUSE OF THE USEFUL LIFE OF MACHINE
IS ESTIMATED TO BE 10 YEAR. SO THE PART OF THE
TOTAL COST SAY RS.10,000 I.E. [1,00,000 * 1/10] OR
[1,00,000 * 10%]IS CHARGED ON P&L A/C OF 2014-15.
THIS VALUE IS TREATED AS EXPENSE BECAUSE IT IS LOSS
IN THE VALUE OF MACHINE ON ACCOUNT OF ITS USE OR
PASSAGE OF TIME AND IS REFERRED TO AS
‘DEPRECIATION’. THE AMOUNT OF DEPRECIATION, BEING
A CHARGE AGAINST PROFIT, IS DEBITED TO INCOME

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