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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