DEPRECIATION

DEPRECIATION

“Depreciation is the gradual and permanent decrease in the value of an asset from any cause.”

Causes Of Depreciation:

2. Some Assets get worn or torn out due to its constant use in production.
3. Some Assets get decreased in their value with the passage of time.
4. Some Assets may meet an accident and therefore it may get depreciated in its value.

Reasons For Providing Depreciation:

1. To reveal the correct profit or loss of a business.
2. To show correct financial position of a business.
3. To make provision for replacement of an asset.

Methods Of Providing Depreciation:

There are three methods of providing depreciation

1. Straight Line Method: This is also termed as Fixed instalment method. Under this method Fixed Percentage on original cost is written off the asset every year. The amount of depreciation is calculated as follows.





2. Reducing Balance Method: This method is also known as Diminishing balance method or written down value method. Under this method depreciation is charged at a fixed rate on the reduced balance every year.

3. Revaluation Method: Sometimes it is not possible to maintain detailed records of certain types of fixed Assets, such as very small items of equipment packing cases and hand tools. In such case the revaluation method is used. under this method the assets are revalued at the end of each year and this value is compared with the value at the beginning of the period. The difference is treated as depreciation.

Formula = Value of Assets beginning + Purchases of Assets during the period –
value of Asset at the end.

Provision For Depreciation: It means saving a part of profit for the replacement of the Asset.

Prudence Concept: According to this concept all the losses incurred or expected to be incurred are to be taken in to account but not all anticipated profits to be taken into consideration while finding the profit. To apply this concept that we take depreciation in the profit and loss account.