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  • Depreciation is also pertained to as “Capital Consumption Allowance” which represents the quantum of capital that would be needed to replace those depreciated assets. It can also be defined as the measure of the exhaustion of the effective life of an asset from any cause during a given period
  • It is the permanent decline in the value of an asset. The gradual decrease in the value as well as in the usefulness of an asset due to its nature and usage is termed as depreciation. Depreciation is the term used for the measure of wearing out of a fixed asset
  • As time goes on all the fixed assets are expected to be less efficient. Depreciation is calculated as the estimate of this measure of wear & tear out and is charged to the Profit & Loss account either on a monthly or annual basis. The  Net Book Value of the asset is obtained at the expense of the resourceless absolute deterioration
  • It has been demonstrated that whenever a resource is used, its value decreases. As a result of deterioration, the resource may become obsolete at times
  • As such, it may be depicted as the deterioration is that portion of a resource’s expense that is reduced from incomes for the administrations of the resource in the activity of a business

Institutional definitions of depreciation
  • Based on facts provided by the Institute Of Chartered Accountants Of India, “Depreciation is a proportion of the destroying, utilization or other loss of worth of a depreciable resource emerging from its gradual use or oldness through technology and market changes.”
  • “Depreciation is the allocation of an asset’s depreciable amount over its estimated useful life,” according to the International Accounting Standards Committee. Depreciation for the accounting period is either directly or indirectly charged to income.”

Important Terms:

  • Depreciable Assets: The assets whose lifetime can be estimated and is also useful during two or more accounting periods in production or service activities of an organization can be called depreciable assets
  • Useful life span : The time during which the asset is helpful in the normal business activities of a firm, that time is termed as useful life. It can be less than the total lifetime of the asset. It can be exactly predetermined or it should be estimated on a reasonable basis
  • Depreciable Amount:  The cost of acquisition and installation of an asset obtained after reducing any realizable value at the end of useful life is said to be a depreciable amount
  • Effluxion of time: As in the case of leased assets, the effluxion of time is the passage of time irrespective of the actual use of an asset
  • Obsolescence:  An asset that is becoming out of date due to improved models or methods is referred to as obsolescence

Causes of Depreciation:

  • Wear and Tear due to Use or Passage of Time: Wear and tear is nothing but deterioration that is followed by a decrease in the value of an asset, resulting from its use in business operations to earn revenue
  • Expiration of Legal Rights: Some orders of means lose their value after the agreement directing their use in business comes to an end after the expiry of the predetermined period
  • Obsolescence: Obsolescence is another factor driving the depreciation of fixed assets. In common language, obsolescence means being “out-of-date”.  An actual asset that is becoming outdated on account of the availability of a better type of asset is referred to as obsolescence
  • Abnormal Factors: These are the factors that are responsible for the drop in the use of the asset. Viz, accidents due to the earthquake, fire, cataracts, etc., Accidental loss is endless but not continuing

Advantages and disadvantages of depreciation

Advantages

Disadvantages

There are many ways to calculate depreciation is to make use of the methods such as; 

  1. Methods of Depreciation
  2. Straight-Line Depreciation Method
  3. Method of Diminishing Balance
  4. Method of Sum of Years’ Digits
  5. Method of Double Declining Balance
  6. Method of Sinking Funds
  7. The Annuity Method.
  8. Method of Insurance Policy.
  9. Method of Discounted Cash Flow.
  10. It is the most simple method of calculating depreciation. 

Under the given  system options, the book value of the asset will be charged further for conservation and form in the final times as compared to original times.

Under this system, means can be downgraded up to the net scrap value or zero value. 

It’s delicate to ascertain a suitable rate of depreciation. 

Under this system, the same quantum is charged as depreciation in a Profit & Loss Account.

It isn’t suitable for means having a long life and high value.

In Conclusion: 

Anyone who requires the service provided by these assets can purchase and use them. The value of an asset depreciates over time as it is used up, worn down, and torn down. As a result, the value of the equipment or asset decreases year after year. Each year, this decrease in value determines the selling price of the equipment. Because a company’s balance sheet includes the values of all its equipment and assets, the effect of depreciation is also reflected in it. It can sometimes be advantageous for the owner of the asset or business to reduce his tax expenses during accounting.