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Importent Terms


The term “depreciation” is used when expired utility of physical asset (building, machinery or equipment) is to be recorded.



The term “depletion” is applied to the process of measuring and recording the exhaustion of natural resources such as ore deposits, oil-wells, timber stands, quarries, etc. Depletion differs from depreciation in that the former implies removal of a natural resource, i.e., a physical shrinkage or lessening of an estimated available quantity, while the latter implies a reduction in the service capacity of an asset.


The term “amortization” is used for describing the process of writing down the long-term investments in intangibles such as leaseholds, patents, copyrights, trade marks, goodwill and heavy organisation costs.


The term “obsolescence” refers to reduction in the useful life of the asset arising from such factors as (a) technological changes, (b) improvement in production method, (c) change in market demand for the product or service output of the asset; or (d) legal or other restrictions. It is distinguished from exhaustion, wear and tear and deterioration in that these terms refer to functional loss arising out of a change in physical condition.


When a property is returned to the landlord after the expiry of lease period then he (landlord) is entitled to demand that it can be in as good a condition as when it was leased out. For this purpose leaseholders often set aside some amount each year to provide for any dilapidation that may need to be put right when the property is returned. For accounting purposes the expected amount of dilapidations is added to the cost of leased property. The depreciation is provided on the total cost thus arrived at.

If a firm was providing depreciating on a fixed asset under the straight-line method during the past three years and it wants to change the method to diminishing balance method with retrospective effect, in such a case, the firm would require to take the following steps:
  • Calculation of total depreciation already charged till the date of change according to old method.
  • Calculation of the total depreciation that would have been charged under the new proposed method.
  • Calculation of the difference. If depreciation amount under the new method is more than what was charged under the old method, such difference should be adjusted in the current year by passing the following journal entry:
    • DebitProfit and Loss Account
    • CreditAsset account
  • In case the depreciation amount under the new method is less than what was charged under the old method, the difference would be adjusted in the current year by passing the following journal entry.   
  • Debit  Asset AccountCreditProfit and Loss Account.

In subsequent years, the asset account will appear at its new value from the date of change and depreciation will be charged according to the new method.

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