Page 100 - DEBK-XI(2020)

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C H A P T E R

Depreciation

MEANING OF KEY TERMS USED IN THE CHAPTER

1. Depreciation Depreciation means fall in the value of tangible asset because of:
(i) usage, i.e., wear and tear; (ii) efflux of time;
(iii) obsolescence; or (iv) accident.
2. Depletion The term ‘Depletion’ is associated with extraction of natural resources
like quarries, mines, etc.
3. Amortisation Amortisation means writing off intangible assets over their
estimated useful life.
4. Obsolescence It refers to decline in the economic value of the asset due to innovation
or improved technique, change in taste or fashion or inadequacy of
existing asset due to improved demand.
5. Original or Historical Cost It means cost incurred to acquire the asset up to the point it is ready for
use. It is the basis for depreciation.
6. Residual Value It is the estimated sale value of the asset at the end of its useful
economic life.
7. Accumulated It is a method of recording depreciation under which depreciation is
Depreciation credited to ‘Provision for Depreciation Account or Accumulated
Depreciation Account’. It is the total depreciation expenses already
charged as expense in different accounting periods.
8. Straight Line Method It is a method of providing depreciation under which net cost of the
asset (Historical Cost – Realisable Value) is written off equally over
the useful life of the asset.
9. Written Down Value It is a method of providing depreciation under which a percentage of
Method depreciation is applied every year on the book value (i.e., cost less
depreciation).

CHAPTER SUMMARY

 Depreciation is the cost of fixed asset that has expired because of its usage and/or with
efflux of time.
 Causes of Depreciation are:
(i) wear and tear, (ii) efflux of time, (iii) obsolescence and (iv) accident.
 Objectives of providing Depreciation are to:
(i) ascertain correct profit or loss.
(ii) show a true and fair view of the financial position.
(iii) show the assets at their correct values.
(iv) determine the correct cost of production.
(v) retain funds out of profit, for replacement.
(vi) comply with legal provisions.