How to determine depreciation?

(Finance, Accounting, Taxes & creative knowledge)

Depreciation (concept)

Depreciation means the decrease in the value of fixed assets by any cause. Depreciation is the gradual decrease in the value of the asset from any cause. Depreciation is the shrinkage in the value of an asset at a given date as compared with its value at a previous date. The term depreciation represents loss or diminution in the value of an asset consequent upon wear and tear, obsolescence, effluxion of time or permanent all in market value .Depreciation is this diminution in the financial value of an asset owing to wear and tear, effluxion of time obsolescence or similar cause.”

Depreciation is diminution in the value of assets from any cause. Such decrease in the value of fixed assets is recognized by businessmen and accountants. Sound accounting principles require that depreciation should be equally spread over the period of useful life of assets.

 

Key words of deprecation

* Decrease in the value of fixed assets.

* The gradual decrease in the value of the asset.

*the shrinkage in the value of an asset.

* given date as compared with its value at a previous date.

*Represents loss or diminution in the value of an asset.

* Consequent upon wear and tear, obsolescence, effluxion of time or permanent all in market value.

* Diminution in the financial value of an asset owing to wear and tear, effluxion of time obsolescence or similar cause.

* Such decrease in the value of fixed assets is recognized by businessmen and accountants.

* Depreciation should be equally spread over the period of useful life of assets.

 

Determination of deprecation

It is very important to decide how much depreciation will be written every year. If the amount of depreciation charged is reasonable, one will be able to attain the object of proving the depreciation. But if the amount of depreciation charged is unreasonable the purpose of provision of depreciation shall be defeated. It makes clear that calculation of the correct amount of depreciation is very vital for the business and should be done with due care and observation.

While determine the amount of depreciation following should be taken into account.

Basic factors of depreciation

1)      Original cost of fixed assets (i.e. purchase price plus fright plus creation charges etc.)

2)      The estimated amount of expenditure on repairs during the life period of assets.

3)      Estimated life of the assets after which it will be discarded.

4)      Estimated residual or Scrap value of assets.

5)      Capital expenses incurred on assets.

6)      The amount of interest received as income on the amount invested.

7)      Possibility of obsolescence.

Only so much depreciation has to be productive as it will reduce the value of the assets to its scrap value at the end of its estimated life.

Objects of making provision for deprecation

It is essential that every year a reasonable amount should be charges as depreciation on fixed assets due to following reasons:

1) To find out the correct profit for the year.

2) To find the correct financial position.

3) To find out the correct cost of production

4) To make provision for replacement of assets.

5) To recover the cost of assets and to keep the capital of owner intact.