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According to American Institute of Certified Public Accountants (AICPA) ‘Depreciation accounting is a system of accounting which aims to distribute cost or the basic value of tangible capital asset less salvage (if any), over the estimated useful life of the unit in a systematic and rational manner. It is the process of allocation and not valuation’.

Depreciation has been defined as ‘the diminution in the utility or value of an asset, due to natural wear and tear, exhaustion of the subject-matter, effluxion of time accident, obsolescence or similar causes’. The words “accident”, “obsolescence” and the phrase “effluxion of time” included in the definition, signify that when an asset held by a business cannot be employed for even one of the purposes for which it was acquired due to some damage suffered, the assets having become out of date or due to no occasion having arisen for it to be used, the loss caused to the business will be depreciation. Depreciation caused by any one of the last mentioned factors often is described as external depreciation, to distinguish it from the natural wear and tear of assets which is known as internal depreciation.

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