DEPRECIATION ACCOUNTING, FINAL ACCOUNTS AND ELEMENTS OF COST

Meaning of Depreciation

Depreciation means the gradual decrease or loss in the value of asset due to its usage, passage of time and normal wear and tear. This gradual decrease in the value of the asset is of permanent nature, which cannot be made good by normal repair and maintenance.

Accounting Standards issued by Institute of Chartered Accountants of India defines depreciation as follows:

“Depreciation is a measure of wearing out consumption or loss in value of assets that are depreciable due to use, time period or obsolescence due to new technology and market changes. Depreciation is allocated in order to charge a some amount of money as depreciation amount in each accounting period during the expected useful life of the assets.”

Whereas International Accounting Standard Committee defines, “Depreciation is the allocation of the depreciable amount of an asset over its estimated life.”

We can summarize that depreciation as a „process of allocation of the cost of depreciable assets‟ over its useful life in a rational and systematic manner.

Characteristics of Depreciation

The important characteristics of depreciation are noted below:

• Depreciation is charged on fixed and tangible assets only.
• Depreciation refers to a permanent / gradual and continuous decrease in the utility value of a fixed asset and it continues till the end of the useful life of the asset.
• Depreciation is a charge against profit for a particular accounting period.
• Depreciation is always computed in a systematic and rational manner since it is not a sudden loss.
• Depreciation is a process of allocation of expired cost and not of valuation of fixed assets.
• Depreciation represents only an estimate and not the exact amount.
• Depreciation may be physical and functional.
• Total depreciation cannot exceed the cost of the depreciable asset.
• It is non-cash charge and hence does not involve outflow of cash.
• The basis of charging depreciation is economic life of the asset and the cost thereof. Market value has no relevance for calculating depreciation.
• Depreciation is different and distinct from Amortization, Depletion Obsolescence, Dilapidation and Fluctuation.

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