Definition, Explanation and Characteristics of "Depreciation" or "Accounting
Depreciation":
Learning Objectives:
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Define and explain the terms
"depreciation" or "accounting depreciation".
The value of assets gradually reduces on
account of use. Such reduction in value is known as depreciation.
Different authors have given different definitions of depreciation, such as:
"Depreciation may be defined as the permanent
continuous diminution in the quality, quantity or value on an asset."
(By Pickles)
"Depreciation is the gradual permanent
decrease in the value of an asset from any cause." (By Carter)
"Depreciation may be defined as a measure of
the exhaustion of the effective life of an asset from any cause during a
given period." (By Spicer & Pegler)
Depreciation is the diminution in intrinsic
value of an asset due to use and/or the lapse of time." (By Institute
of Cost and Management Accountants, England)
"Depreciation is the reduction in the value of
a fixed asset occasioned by physical wear and tear, obsolescence or the
passage of time." (Northcott & Forsyth)
"Depreciation is the diminution in the value
of assets owing to wear and tear, effluscion of time, obsolescence or
similar causes." (Cropper)
From the above definitions, it follows that an
asset gradually declines on account of use and passage of time and this
causes permanent reduction in the value and utility of asset. Such reduction
in the value or utility of asset is called depreciation. In other words,
expired cost or utility of asset is depreciation.
Characteristics of Depreciation:
Depreciation has the following
characteristics:
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Depreciation is charged in
case of fixed assets only. e.g., building, plant and machinery,
furniture etc. There is no question of depreciation in case of current
assets - such as stock, debtors, bills receivable etc.
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Depreciation causes
perpetual, gradual and continual fall in the value of assets.
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Depreciation occurs till
the last day of the estimated working life of the asset.
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Depreciation occurs on
account of use of asset. In certain cases, however, depreciation may
occur even if the assets are not used, e.g., leasehold, property,
patent, copyright etc.
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Depreciation is a charge
against revenue of an accounting period.
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Depreciation does not
depend on fluctuations in market value of assets (see
difference between depreciation and
fluctuation page).
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The amount of depreciation
of an accounting year cannot be determined precisely - it has to be
estimated. In certain cases, however, it may be ascertained exactly,
e.g., leasehold property, patent right, copyright etc.
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Total depreciation of an
asset cannot exceed its depreciable value (cost less scrap value).
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