Depreciation is the systematic allocation of the cost of a fixed asset over its useful life. It is charged to Profit & Loss account and reduces the carrying value of assets. Common methods include Straight Line Method (SLM) and Written Down Value (WDV) method.
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Depreciation is the systematic allocation of the cost of a fixed asset over its useful life. It is charged to Profit & Loss account and reduces the carrying value of assets. Common methods include Straight Line Method (SLM) and Written Down Value (WDV) method.
Depreciation arises due to wear and tear, passage of time, obsolescence and depletion.
[ ext{Depreciation per year} = rac{ ext{Cost} - ext{Scrap value}}{ ext{Useful life}}]
Depreciation is charged at a fixed percentage on book value each year.
Without provision account: Depreciation A/c Dr. To Asset A/c
With provision for depreciation: Depreciation A/c Dr. To Provision for Depreciation A/c
Depreciation is transferred to P&L as expense and asset is shown at cost less accumulated depreciation.
When method is changed, depreciation is recomputed as per new method from the beginning and the difference is adjusted in Profit & Loss account.
From this topic
Depreciation is provided to (i) ascertain true profit by charging a fair portion of the asset’s cost against the revenue of the period; (ii) show true financial position by reducing fixed assets to their carrying value (cost less accumulated depreciation); (iii) provide for replacement of assets in the long run by retaining profits; and (iv) comply with accounting standards and statutory requirements. Without depreciation, profit would be overstated and assets would appear at unrealistically high values.
Under Straight Line Method (SLM), depreciation is calculated on original cost (less scrap value) and the same amount is charged every year. Under Written Down Value (WDV) method, depreciation is calculated at a fixed rate on the reducing book value, so depreciation is higher in early years and lower in later years. SLM suits assets with uniform benefits (e.g., buildings), while WDV suits assets that lose efficiency quickly or become obsolete (e.g., machinery, computers).
Depreciation is the systematic allocation of the cost of a fixed asset over its useful life. It arises due to wear and tear, passage of time, obsolescence, depletion and other factors that reduce the service potential of the asset. The objectives of providing depreciation are to ascertain true profit by matching asset cost with revenue, to show true financial position by stating assets at carrying value, to provide for replacement of assets over time, and to follow accepted accounting principles and statutory requirements.