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Meaning of Depreciation

Depreciation may be described as a permanent, continuing and gradual shrinkage in the book value of fixed assets. It is the cost of assets consumed in a business and not on its market value.

According to Institute of Cost and Management Accounting, London (ICMA) terminology “The depreciation is the diminution in intrinsic value of the asset due to use and/or lapse of time.”

Accounting Standard VI issued by The Institute of Chartered Accountants of India (ICAI) defines depreciation as follows: “Depreciation is a measure of the wearing out, consumption or other loss of value of depreciable asset arising from use, efflux ion of time or obsolescence through technology and market-change. Depreciation is allocated so as to charge fair proportion of depreciable amount in each accounting period during the expected useful life of the asset. Depreciation includes amortisation of assets whose useful life is pre-determined”.
  • The amount of depreciation basically depends upon three factors, i.e. Cost, Useful

Depreciation has a significant effect in determining and presenting the financial position and results of operations of an enterprise. Depreciation is charged in each accounting period with reference to the size of the depreciable amount. It should be noted that the subject matter of depreciation, or its base, are 'depreciable' assets which:
  • “are expected to be used during more than one accounting period;
  • have a limited useful life; and
  • are held by an enterprise for use in production or supply of goods and services, for rental to others, or for administrative purposes and not for the purpose of sale in the ordinary course of business.”
Examples of depreciable assets are machines, plants, furniture's, buildings, computers, trucks, vans, equipments, etc.

Further, depreciation is the allocation of 'depreciable amount', which is the “Historical cost”, or other amount substituted for historical cost less estimated salvage value.

Another point in the allocation of depreciable amount is the 'expected useful life' of an asset. It has been described as:
  1. The period over which a depreciable asset is expected to the used by the enterprise, or
  2. The number of production of similar units expected to be obtained from the use of the asset by the enterprise.”

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