DepreciationINTRODUCTION Themonetaryvalueofanassetdecreasesovertime duetouse,wearandtearorobsolescence.This decrease is measured as depreciation.Defnition AccordingtoPICKLES,Depreciationisthe permanentandcontinuingdiminutioninthequality or value of and assetFromtheabovedefinitionitcanbeconcludedthat depreciationisa gradualdecrease in the value of an asset from any cause.OB!"T#$! OF D!%&!"#ATO'(.&eflectreductionintheboo)valueoftheasset due to obsolescence or wear and tear,*. +pread a large e,penditure -%urchase %rice of the asset . proportionately over a fi,ed period to match revenue receive from it,/.&educetheta,ableincomebychargingthe amount of depreciation against the company0s total income "auses of Depreciation (. 1ear And Tear1earandtearreferstoadeclineintheefficiencyofassetduetoitsconstant use.1henanassetlossesitsefficiency,itsvaluegoesdownanddepreciation arises. This is true in case of tangible assets li)e plant and machinery, building, furniture, tools and equipment used in the factory.*. !ffusion of TimeThe value of asset may decrease due to the passage of time even if it is not in use.Therearesomeintangiblefi,edassetsli)ecopyright,patentright,and lease hold premises which decrease its value as time elapse."ontinuing/. !,haustionAn asset may loss its value because of e,haustion too. This is the case with wasting assets such as mines, quarries, oil2wells and forest2stand. On account of continuous e,traction, a stage will come where mines and oil2wells get completely e,hausted.3. Obsolescence"hangesinfashionaree,ternalfactorswhichareresponsibleforthrowingoutofassets even if those are in good condition. For e,ample blac) and white televisions have become obsolete with the introduction of color T$s, the users have discarded blac) and white T$s although they are in good condition. +uch as loss on account of new invention or changed fashions is termed as obsolescence4. Accidents.An asset may meet an accident and , therefore, it mayget depreciated in its value.Basic Features of Depreciation(. The Term depreciation is used only in respect of fi,edassets.Ofcourse,thecurrentassetsmay alsolosetheirvalue.5ossonaccountoffallin theirvalueista)encareofbyvaluingthemfor balancesheetpurposes,atcostormar)etprice whichever is less*. Depreciationisachargeagainstprofit.This meansthattrueprofitofthebusinesscannotbe ascertained without charging depreciationBasic Features of Depreciation/.Depreciationisdifferentfrommaintenance. 6aintenancee,pensesareincurredfor)eeping themachineinastateofefficiency.7owever. Anydegreeofmaintenancecannotassurethat theassetwillneverreachastateofscrap.Of course goodmaintenance delays this stage but it cannot absolutely prevent itBasic Features of Depreciation4. All depreciation although the process may be inisible or gradual!ethods o" Depreciation+traight 5ine Depreciation 6ethod+traight line method depreciates cost evenly throughout the useful life of the fi,ed asset. +traight line depreciation is calculated as follows8Depreciation per annum 9 -"ost :#nstallation cost2 &esidual $alue. ; *,???.&esidual $alue is >4??.AnnualDepreciationcostwillbe>4??9-*???24??.; /years+traightlinedepreciationmethodisappropriatewhere economicbenefitsfromtheassetaree,pectedtobe reali@ed evenly during its useful life. #t is also convenient wherenoreliableestimatecanbemaderegardingthe pattern of economic benefits over an asset=s useful life.#$ample %A firm purchases a plant for a sum of (?,??? AF' on (st anuary,*??A. installation charges are *,??? AF'. %lantisestimatedtohaveascrapvalueor(,??? AF'atendofitsusefullifeoffiveryears. Bouare requiredtoprepare%lantAccountforfiveyears chargingdepreciationaccordingto+traight5ine 6ethod.#$ample %AB""o.%urchased6achineryAmount*?,??,??? on (st anuary *??C, *4,??? was spent on #nstallation of the 6achine. The "ompany follows +traight 5ine 6ethodofDepreciation.5ifeofthe6achineis4 Bears. +crap $alue is *,??,???.#$ample %Theoriginalcostofmachineis(*,??,???AF'it waspurchasedon(2*2*??D.ithasalifeof4years andascrapvalueis3?,???AF'.Depreciationis providedonthestraightlinemethodon/(st December each year. %repare the machinery account for 3 years.Diminishing &alance !ethod