Concept of Depreciation

                               Concept of Depreciation        

Property , plant and equipment are tangible items that:
(a) Are held for use in the production or supply of goods and services, for rentals to other, or for administration purposes; and
(b) Are expected to be used during more than a period of 12 months.
These are also called fixed assets in common parlance. When a fixed asset is purchased, it is recorded in books of account at its original cost/acquisition cost. However fixed assets are used to earn revenues for a number of accounting periods in future with the same acquisition cost until the concerned fixed assets is sold or discarded. It is therefore necessary that a part of the acquisition cost of the fixed assets is allocated as an expense in each of the accounting period in which the asset is utilised. The amount of fixed assets allocated in such manner to respective accounting period is called depreciation. Value of such assets decreases with passage of time mainly due to following reasons:

Diminution – it means decrease in market value of asset.
Wear and Tear – Due to actual use of assets.
Efflux Of time – Due to passage of time, even if assets are not used.
Obsolescence- Due to technological changes, improvement in production method, changes in market demand for product and service and legal and other restriction.
Depletion- decrease in value of assets (natural resources) due to consumption i.e. coal mines, etc.

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