The word depreciation denotes the loss in the value of an asset due to its continuous usage, change in technology, time, etc. In other words, depreciation may be described as a lasting and perpetual decline in the value of an asset and a gradual decrease in the quality or quantity or value of an asset every year like plant and machinery, buildings, furniture, etc. It arises due to the following causes:
- Wear and tear by constant use
- Effluxion of time
- Structural defects
- Non-usage of asset
A Businessman, in the course of his business, acquires certain fixed assets like Land, Buildings, Machinery, Furniture, Equipment, etc. To carry on business to earn the profit. These are acquired by the trader, not with a view for resale or conversion but to carry on a business.
Meaning of Depreciation
According to Malchman and Slavin___ “Depreciation refers to the process of estimating and recording the periodic charges to expense due to expiration of the usefulness of a capital asset”.
According to Spicer and Pegler___ ” Depreciation may be defined as, “The measure of the exhaustion of the effective life of an asset from any cause during a given period”.
Objectives of Depreciation
- Ascertain the true profit.
- To provide necessary funds for its replacement.
- Show the real value of fixed assets.
- Keep capital Intact.
- To follow legal provisions.
Terms Related to Depreciation
- Amortization: It denotes the process of allocating the cost of an asset throughout its probable useful life. The term is associated with intangible assets such as copyrights, patents, goodwill, and trademarks.
- Depletion: This term applies to assets in the form of natural resources. It is a deduction that allows accounting for the decline in the resources’ reserves. Various natural resources such as forests, mines, and oil wells experience this phenomenon.
- Obsolescence: It occurs due to change in technology. Unlike other causes, obsolescence lends to a sudden fall in the value of the asset. Ex: CD players, video cassette players were made redundant and faced obsolescence.
- Dilapidation: This type of loss in value is associated with leasehold assets.