what is depreciation in accounting class 11

what is depreciation in accounting class 11
Meaning and Definition of Depreciation
In common parlance, depreciation refers to a decrease in value, but if seen from the point of
view of accounting, it means a decrease in the book value of a fixed asset. Due to
continuous use of fixed assets, due to passage of time or due to any other reason, its value
and efficiency decreases and after some time the value remains equal to zero. A gradual
(gradual) permanent decrease in the value of an asset due to any reason is called
‘depreciation’ or ‘depreciation’. J. R. According to Williams, “The gradual decay of value is
due to use”. Are; Like-Wear and Tear, Effluxion of Time, Obsolescence, Accidents etc.
Meaning – Depreciation refers to permanent and continuing loss or decrease in the quality,
kind or value of an asset due to wear and tear, lapse of time, obsolescence, destruction or
accident.
Fixed assets provide economic benefits to the organisation or enterprise over their lifetime.
Depreciation is a measure of the cost of economic benefits of a tangible fixed asset that has
been consumed over an accounting period.
Depreciation reduces the book value of the asset. Hence it is an expense which is charged
to Profit & Loss A/c or Statement of Profit & Loss.
Some Important Definition of Depreciation
According to Spicer and Pegler, “Depreciation is the measure of the end of the useful life of
an asset for any reason over a specified period of time.
According to the Institute of Cost and Management Accountants terminology, (” Depreciation
is the diminution in the intrinsic Value of the asset. ” )
According to R. N. Carter (” Depreciation is the gradual and Permanent decrease in the
Value of an Asset from any cause “

According to William Pickles — Depreciation is a permanent and continuing decrease in
the quality, quantity or value of an asset.
( Depreciation is a measure of wearing out, Consumption or other loss of Value of a
depreciable Asset arising from use, effluxion of time or obsolescence through technology
and Market changes. Depreciation is allocation so as to change a fair preparation of the
depreciable amount in each accounting period during the expected useful life of the asset. )
According to the American Institute of Accountants Committee of Technology, “Depreciation
Accounting is a system of accounting that is arrived at after deducting the residual value
(Scrap or Salvage) from the cost of Tangible Capital Assets. distributes the remaining
amount over the useful life of the asset in an orderly and prudent manner, it is not a method
of valuation but of an allocation.
Thus, depreciation is a process of allocation, not valuation. The valuation of the year is a
part of the total charge which is distributed for that year according to this method. Thus,
vesting refers to the amount held or distributed over the useful life of the asset. Obviously
there is just a revenue loss and it is necessary to charge it to the profit and loss account
otherwise the correct profit cannot be calculated.
Remember, depreciation is deducted on all other tangible fixed assets except land.
According to Indian Accounting Standard -6 (AS -6), the following facts are necessary for
depreciation
(1) Depreciable Assets –- Depreciable assets are those assets:
(i) which are likely to be used in more than one accounting period;
(ii)which have a limited useful life; And
(iii) which are held by the undertaking for production or for the supply of goods and services
on hire to others or for administrative purposes and are not held for sale in the ordinary
course of business
(2) Useful Life — Useful life is either the period over which the depreciable asset is
expected to be used by the enterprise or the production or the number of identical units that
the enterprise is likely to obtain from the use of that asset.
(3) Depreciable Amount — The depreciable amount is the historical cost of a depreciable
asset or other amount shown in the financial statements as historical cost less estimated
residual value. Historical cost is the monetary cost of an asset or its equivalent amount
incurred in establishing and operating it and for additions and improvements to it. For
example, Image Ltd. If a company purchases an old machine and spends on repairing and
installing it, then the cost of the asset will be as follows:
Cost of the asset = Purchase cost of the asset + Transportation cost of the asset +
Repair cost of the asset + Cost of setting up the asset.

(4) Stability in the System of Depreciation — Whatever the fixed instalment method of
depreciation or the gradual depreciation method is adopted, there should be stability in it.
The rate of depreciation and the policy of depreciation cannot be changed repeatedly. If
there is any change in the rate of depreciation or policy/practice for any reason, it should be
mentioned in the financial statement.
Depreciation and Other Related Terms
Depreciation, Depletion and Amortisation
Various terms have been developed in accounting which are used to denote the decrease in
the value of different types of assets. These words are-depletion, depletion and excretion.
There is a simple difference between these words, but in India no distinction is made
between these words and the word depreciation is used for all types of assets.
Depreciation — The term depreciation is used in relation to those tangible assets, such as
building, plant, furnishings, equipment, etc., whose value decreases permanently and
continuously due to wear and tear or other reasons.
Depletion — The term ‘depletion’ is used to denote a reduction in the value of those
perishable or decaying assets in which the reason for this reduction is not wear and tear but
the extraction or removal of something from them. Hence, the term depletion is used for oil
wells, mineral mines, stone mines etc. Thus, depletion is the extraction of natural resources
or mineral resources while depreciation refers to the decrease in the service capacity of the
asset.
Amortisation — The term ‘deprecation’ is used to denote the diminution in the value of
long-term intangible assets such as copyrights, trade marks, patents, goodwill, leases, etc.
goes. These can be displayed in the form of charts as follows
Types of long term Assets Terms of expenses for write offs
1. tangible assets None

(i) Land (ii) Machinery, Plant, Building, Tools
& Equipments,
Furniture & Depreciation (Depa Fixtures,
Cars/Vehicles
Depreciation
Depletion
Amortisation
2. Intangible assets
(i) patents, copyrights, trade marks,
goodwill, lease etc.
Even though land is a tangible asset, depreciation is not charged on it because land has an
unlimited useful life.
Fluctuation — Appreciation is a temporary change in the value of an asset. It can be
positive or negative. Degradation is a continuous and regular process but ascension is
neither a continuous process nor a regular process. Generally this term is used in the
context of current assets.
Features or Characteristics of Depreciation
Following are the main features of depreciation.
(1) Depreciation is provided for fixed assets.
(2) Depreciation means reduction in the book value of a fixed asset.
(3) The decrease (or depreciation) in the value of the asset is gradual, regular and
permanent.
(4) In the form of depreciation, there is a continuous decrease in the value of the asset.
(5) Depreciation may be due to various reasons, such as wear and tear, lapse of time,
obsolescence of asset, accident etc.
(6) Depreciation is a revenue loss charged to the profit and loss account.
(7) Depreciation is a process of distribution of cost of assets and not of valuation.

(8) Depreciation can be physical and functional.
(9) Depreciation is calculated in a systematic and prudent manner.
(10 ) Depreciation is inevitable (must). Whether the property is used carefully or carelessly, it
is bound to depreciate.
(11) Depreciation is a non-cash operating expense.
Objects of Providing Depreciation or need for Charging Depreciation
The main purpose or requirement of depreciating is as follows:
(1) Finding the Right Production Cost — Determining the correct cost of production It is
necessary to provide for proper depreciation to determine the correct cost of production. If
planning is not done for this, then the correct production cost of the items will not be known.
(2) Determination of Correct Income — Depreciation is a type of expense. Due to
continuous use of the asset, its value decreases and it is necessary to book this decrease in
the profit and loss account every year, otherwise the net profit or loss cannot be ascertained
correctly.
(3) Demonstration of correct financial position — The correct financial position of any
business is studied through its economic balance sheet. Therefore, it is necessary that all
the assets are shown in the balance sheet at their actual value. If there is no provision for
depreciation on the assets, then the correct financial condition of the organisation cannot be
displayed.
( 4 ) Arranging for the replacement of the asset One of the objectives of depreciation is that
when the lifespan of the asset ends, it can be replaced by purchasing a new asset.
Therefore, at the end of each year, the amount of depreciation which is debited to the profit
and loss account, can be used to purchase a new asset after the life of the asset is over. If
the provision for hys is not made then the problem of capital will arise to re-establish the
property.
(5) Keeping the capital safe — Depreciation is also arranged with a view to keep the
capital safe. If depreciation is not provided and profit is distributed among the shareholders
without providing for depreciation, then it would mean that profit has been distributed out of
the capital.
(6) Statutory requirement of depreciation — According to section 205 of the Companies
Act, 1956, a company has to compulsorily provide for depreciation on fixed assets before
distributing profits, similarly according to section 211 the company’s profit and loss
Depreciation is required to be booked in the account otherwise the profit and loss account
will not reflect the true and fair profit of the company for the financial year.

(7) Getting income tax exemption — Under the Indian Income Tax Act, 1961, there is a
provision of tax exemption in respect of depreciation. If proper provision is not made for
depreciation, then more income tax will have to be paid if the profit is more. Therefore, it is
necessary to provide for depreciation in order to get income tax exemption.
Causes of Depreciation
The main reasons for the decline are the following.
(1) War And Tear — Due to the use of assets, wear and tear occurs in them and they
become old and weak, as a result of which their value decreases.
(2) Passage or Effluxion of Time — Some assets (such as copyright, patent, lease, trade
mark etc.) are such that their life span is fixed. Hence, as time passes, their value keeps on
decreasing. The decrease in the value of such assets is called ‘depreciation over time’.
(3) Obsolescence — Sometimes, due to new inventions, there is a decrease in the value of
old assets even though they are not useless. For example, when a new machine is invented,
it becomes more expensive to operate an old machine because the new machine is more
productive and does a better job. In such a situation, a new machine is used in place of the
old machine. Thus the old asset becomes obsolete. This loss is called depreciation from
obsolescence. Sometimes the situation of obsolescence also arises due to change in the
interest and preferences of the consumers.
(4) Depletion — Some assets are of perishable nature, such as – Mineral mines, forests, oil
wells etc. means natural assets. As the materials are extracted from such properties, their
reserves keep on decreasing. This sequence of emptying of the reservoir is called depletion.
Thus depletion is a cause of degradation
(5) Permanent Fall in Market Value — Sometimes there is a fall in the market value of the
property. Thus reduction in value is treated as depreciation. For example, there is a
tendency to decrease the value of investment, animals and stock. This type of loss is also
called loss by fluctuation.
(6) Accidents — Truck, Motor, Tractor, Car etc. are such assets in which the possibility of
accident remains all the time. Hence, loss also arises due to accident.
Depreciation and Obsolescence
Obsolescence is the loss in value of a fixed asset due to removal of it due to research,
invention or change in technology before its estimated life. Obsolescence is one of the
various causes of depreciation.
Following are the differences between decline and obsolescence:
(1) Meaning — Depreciation is the decrease in the book value of fixed assets due to various
reasons, while obsolescence is the decrease in the value of those assets due to new
inventions.

(2) Certainty — Depreciation is certain to occur, whereas obsolescence is uncertain as new
inventions may or may not occur.
(3) Nature of Loss — Depreciation is a revenue loss, while obsolescence is a capital loss or
can be considered a Deferred Revenue Expenditure.
(4) Nature — Under depreciation, there is a gradual decrease in the value, whereas in
obsolescence there is a sudden decrease in the value of the asset due to invention.
(5) Causes — Obsolescence is considered a cause of depreciation, whereas it is not so in
the case of depreciation.
Depreciation and Fluctuation
The following are the differences between declension and accentuation :
(1) In terms of meaning — Depreciation is a permanent and continuous decrease in the
book value of any fixed asset due to any reason, while the decrease or increase due to
temporary changes in the market value of an item as a result of changes in demand and
supply is called depreciation. Say pronunciation.
(2) Relationship — Depreciation is related to fixed assets, whereas appreciation is related
to temporary or current assets. Similarly, it is related to the book value of the assets, while
the capitalisation is related to their market value.
(3) Attitude is permanent but utterance is temporary.
(4) Continuous Process — Degradation happens continuously or continuously, while it
does not happen in the pronunciation.
(5) Certainty –- Loss in the form of depreciation is certain, while appreciation is uncertain. It
cannot be said by how much the prices will increase or decrease.
(6) Decrease and increase — There is always a decrease in the value of assets under
depreciation, but there is both decrease and increase in values

under appreciation.
(7) Accounting — Depreciation is taken to the profit and loss account as it is treated as
revenue loss but it is not done so in capitalisation. Yes, in special circumstances special
provision is made in the accounts when the price is less than the cost price.
Factors Determining / Affection Depreciation
The following are the factors affecting the amount of depreciation :
Factors affecting the amount of depreciation

(1) Total Cost of the Assets — In the purchase price of the property, all those expenses
should be added which have been spent in bringing or setting up the property, such as the
rent for bringing the property, road insurance and the cost of its establishment etc.
Cost of Assets = Cost Of Purchases + Freight + Installation Expenses
(2) Estimated Useful Life of Assets — The useful life is the period over which the asset will
continue to be useful to the business. For example, if a machine can run for 20 years but
due to new inventions, it will be used only for 15 years, then its estimated life-span will be
considered as 15 years only.
(3) Estimated Scrap or Residual Value — The value that will be obtained by selling the
asset at the end of its life is called Scrap Value or Residual Value.
Example — Like if a machine is purchased for ₹ 60,000. ₹ 6,000 was spent on hiring it and ₹
2,000 was spent on its installation. According to the estimate of experts, this machine will run
for 10 years and its residual value after 10 years will be ₹ 6,000, then the amount of
depreciation on this machine is
Calculation
The calculation will be done on ₹ 60,000 + 6,000 + 2,000 – 6,000 = ₹ 62,000 i.e. 62,000 10 =
₹ 6,200 per year for 10 years
Cost of Acquisition
(A) (Cash paid for the Asset + Expenditure for Freight + Insurance while in-transit + Sale-
tax+ Installation and other necessary Costs)
(B) (Price of Second hand Asset + the initial costs of getting it ready for use, such as,
expenditure for new parts, repairs and painting)।
Depreciation Accounting

According to AICPA, “Depreciation accounting is a method of accounting which aims at
apportioning the cost of fixed/visible assets less residual value, if any, in a systematic and
prudent manner over their useful lives.”
Thus, depreciation accounting is concerned with apportioning the total amount of
depreciation over the useful life of the asset. By deducting depreciation again, the
maintenance of the original investment in the undertaking is ensured. It does not by itself
provide funds or cash for the rehabilitation of such assets.
The method of depreciation should follow a definite plan and should be constant. Again in
each case it should be related to the expected profits in a reasonable manner.
Depreciation Rate / Rate of Depreciation
Depreciation rate refers to the rate percentage which is used to calculate the depreciation for
the write-off of fixed assets under “Straight Line Method” and “Sequential Depreciation
Method” of depreciation. In other words “Depreciation rate means the rate of percentage at
which depreciation is calculated or charged on fixed assets.”
Important points Relating to calculation of Depreciation
> Depreciation Addition to Fixed Assets
Rule 1 — In this situation, if the rate of depreciation is given per annum (% p.a.), then the
depreciation will be calculated from the date of purchase of the asset to the date of
accounting. Will be done
Formula.
Rule 2 — If the rate of depreciation is not mentioned per year, then depreciation will be
calculated at the rate of depreciation on the value of the asset, from the date of purchase of
the asset.
Dates or months will not be taken into consideration.
Formula

Rule 3 — Normally, depreciation is calculated from the date of use of the asset till the last
date of the accounting year, but if the asset is purchased in the middle of a month, then
depreciation will be calculated on that asset from the next month.
Rule 4 — Procedure can be followed:
(a) Depreciation should not be charged on additional assets.
(b) Depreciation is to be computed on the additional asset for a full year.
(c) Depreciation should be charged on the additional asset for six months.
Rule 5 — When it is clearly written in the question that depreciation is to be calculated for
the whole year, then the depreciation will be calculated for the whole year and the date of
purchase of the asset will not be taken into account.
Depreciation on Assets Sold :
Rule 1 — If an asset is sold or an asset is damaged, then depreciation is charged for that
part of the asset.
The calculation will be done till the date of sale / till the date of damage.
Rule 2 — If it is clearly written in the question that on sale of the asset, depreciation will be
calculated for the entire year, then depreciation should be charged for the entire year on the
asset sold.
Rule 3 — If it is clearly mentioned in the question that in the event of sale of the asset,
depreciation will not be calculated, then the year in which the asset is sold will not be
calculated.
> The amount of depreciation will be debited to the credit side of the asset account.
The amount received from the sale of the asset will also be debited to the credit side
of the asset account.

> The balance, if any, in the Assets Sold or Damaged Assets Account should be
transferred to the Profit & Loss A/c / Statement of P & L. If there is a loss, it will be
written in the credit side of the asset account and if there is a profit, it will be written
in the debit side of the asset account.
By writing a Profit & Loss Account, the amount of profit and loss will be shown in the amount
column.
> Computation of profit or loss on sale of asset:
• If the sale price is more than the net worth of the asset, then the difference amount will be
considered as profit ie
(Dep. + Asset Realised) – Net Value of Asset Sold
• If the selling price is less than the net price, then the amount of difference will be
considered as loss.
Net Value of Assets – (Dep + Asset Realised / Selling price .)
Frequently Asked Questions
Qs 1. What the depreciation formula?
Ans. Depreciation Formula ( Asset Cost – Salvage Value ) / Useful Life.
Qs 2. Is depreciation a credit or debit?
Ans. The Depreciation Expense account is Debited,
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