Concept Of Depreciation In Accounting

1814 Words8 Pages
INTERNAL RESEARCH ASSIGNMENT Name of the candidate: MEGHA PANDEY Enrollment no. : 2598 Course: MBA-1st SHIFT Batch: 2014-2016 Semester: First Subject Name: Accounting for Management Subject code: MS-107 Topic of assignment: Subject Teacher’s name: Ms. Ethi Jain Date of submission: DEPRECIATION Concept of Depreciation The concept of depreciation is linked to the concept of business income. In the revenue generating process the use of long-term assets tend to consume their economic potential. At some point…show more content…
Exhaustion: An asset may get exhausted through working. This is the case with mineral mines, oil wells etc. On account of continuous extraction of minerals or oil, a stage comes when the mine or well gets completely exhausted and nothing is left. 3. Obsolescence: Some assets are discarded before they are worn out because of changed conditions. For example, an old machine which is still workable may have to be replaced by a new machine because of the latter being more efficient and economical. Such a loss on account of new inventions or changed fashions is termed as loss on account of obsolescence. 4. Efflux of time: Certain assets get decreased in their value with the passage of time. This is true in case of assets like leasehold properties, patents or copy rights. 5. Accidents: An asset may meet an accident and, therefore, it may get depreciated in its value. On the basis of the above causes, it can be said that depreciation is the decrease or depletion in the value of an asset due to wear and tear, lapse of time, obsolescence, exhaustion and accidents. Basic Features of Depreciation 1. The term depreciation is used only in respect of fixed assets. Of course, the current assets may also lose their value. Loss on account of fall in their value is taken care of by valuing them for Balance Sheet purposes “at cost or market price whichever is…show more content…
Declining Charge Depreciation Methods In case of these methods the amount charged for depreciation declines over the asset’s expected life. These methods are suitable in those cases where the receipts are expected to decline as the asset gets older and it is believed that the allocation of depreciation should be related to the pattern of asset’s expected receipts. Following methods fall in this category. • Diminishing balance method: According to this method, depreciation is charged on the book value of the asset each year. Thus, the amount of depreciation goes on decreasing every year. For example, if the cost of an asset is Rs. 20,000, and the rate of depreciation is 10%, the amount of depreciation to be charged in the first year will be a sum of Rs. 2,000. In the second year, depreciation will be charged at 10% on the book value of the asset, i.e., Rs. 18000 (i.e., Rs. 20,000 – Rs. 2,000) and so on. • Sum of years digits (or SYD) method:This method is on the pattern of Diminishing Balance Method. The amount of depreciation to be charged to the Profit and Loss Account under this method goes on decreasing every
Open Document