Depreciation, Causes of Depreciation, Need for Provision of Depreciation

 Life span of an asset to a issue rests primarily, in description to the direct of its acquisition and auxiliary, regarding its nature. An item acquired for unexpected consumption or sale is a hasty-lived asset and that expected for prolonged use, is long lived asset, even though both manufacture revenues. Whereas the former asset expires within one year of its acquisition, the latter asset lasts longer. Hence regarding entire expenditure just not quite a sudden lived asset becomes an expense and is matched considering-door-door to current year's revenue.

But the slant is otherwise behind a long-lived asset which wears out or depreciates on peak of a long epoch. Accordingly, the outlay of a include asset is innovation anew several years and annually unaided a fraction thereof expires. Simply, this fraction, called expired cost or depreciation, is charged bearing in mind-door to current revenues and the burning, termed un expired cost, is carried take going on for different expiration.

"Depreciation may be defined as the enduring decline in the value of an asset due to use and/or the lapse of the grow olden." -Terminology of Institute of Cost and Management Accountants, England

"Depreciation is the surviving and continuous diminution in the character, quantity or value of an asset." -Pickles

"Depreciation may be defined as take to the fore of the exhaustion of full of zip sparkle of an asset from any cause during a unchangeable grow primeval-fashioned." -Spicer and Pegler

"Depreciation is' the gradual and long-lasting suspend in the value of an asset from any cause."-Carter

Objects of making provision for depreciation

For attaining considering objects, depreciation accounting is a must for all business:

(1) Recovery of cost incurred a propos steadfast assets greater than their useful cartoon thus as to save owner's capital intact;

(2) Provision is for replacement cost in relation to the retirement of indigenous assets ;

(3) to add occurring the depreciation in the cost of production to locate out the precise cost of production;

(4) to locate out exact profit for the year ;

(5) to locate out the truthful financial approach through checking account sheet.

Causes of Depreciation

Depreciation may be of two types :-

(1) Internal-Depreciation which occurs for firm inherent acknowledged causes is known as internal depreciation. The causes of internal depreciation are :

(1.1) Wear and Tear-An asset declines re account of continued use e.g. building, tree-tree-reforest,

machinery etc. such decline depends upon quantum of use of an asset. If a factory works double-shift on the other hand of single shift, depreciation upon reforest and machinery will be doubled. It is obvious that such loss is unavoidable. An asset may be kept in proper operational conditions

through repairs for the times mammal, but it can not be done therefore continuously: At one period the asset will become unfit for repairs, following it will no longer be received.

(1.2) Depletion-Some assets decrease in value proportionate to the quantum of production, e.g. mines, quarry etc. With the raising of coal etc. from coal mine, the quantity bump reduces gradually and after some period it will be abundantly exhausted. Then its value will be nil.

(2) External-Depreciation caused by some uncovered reasons is called external

depreciation.

The causes of external depreciation are:

(2.1) Obsolescence

Some assets, even even though in proper effective order, may become prehistoric. For example primeval robot becomes antiquated along along furthermore the invention of more economical and cold robot, whose productive faculty is generally sophisticated and cost of production is lesser. In order to survive in the competitive way of beast the manufacturer must install auxiliary robot replacing the old one.

(2.2) Passage of times

Some assets diminish in value upon account of sheer passageway of grow old, even if they are not used e.g. lease retain property, patent rights, copy rights etc.

(2.3) Accidents

Assets may be destroyed by deviant reasons such as blaze, earth quake, flood etc. In such a battle the destroyed asset may be written-off as loss and a added one purchased.

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Need for Provision of Depreciation

The dependence for provision for depreciation arises for the once reasons:

(1) Ascertainment of definite profit or loss-Depreciation is a loss. So unless it is considered associated to every one of auxiliary expenses and losses, real profit/loss cannot be ascertained. In new words, depreciation must be considered in order to locate out genuine profit/loss of a matter.

(2) Ascertainment of real cost of production-Goods are produced taking into account the previously of plant and machinery which incurs depreciation in the process of production. This depreciation must be considered as a portion of the cost of production of goods. Otherwise, the cost of production would be shown less than the definite cost. Sale price is normally beatific upon the basis of cost of production. So, if the cost of production is shown less by ignoring depreciation, the sale price will along with be unadulterated at a low level resulting in loss to the business;

(3) True Valuation of Assets-Value of assets gradually decreases upon account of depreciation. If depreciation is not taken into account, the value of asset will be shown in financial records at a figure on peak of its definite value and as a outcome the alter financial slant of the assume will not be disclosed through Balance Sheet.

(4) Replacement of Assets-After some period an asset will be utterly exhausted upon account of use. A supplementary asset subsequently be purchased requiring large quantity of keep. If the cumulative amount of obtain is withdrawn from situation each year without subsequently the loss upon account of depreciation, vital obtain idea may not be user-easy to use for. buying the late postscript assets. In such a skirmish the required maintenance is to be collected by introducing light capital or by obtaining assist by selling some auxiliary assets. This is contrary &0sound advertisement policy.

(5) Keeping Capital' Intact-Capital invested in buying an asset, gradually diminishes upon

account of depreciation. If loss upon account of depreciation is not considered in determining profit/ loss at the year fade away, profit will be shown more. If the excess profit is withdrawn, the effective capital will gradually shorten, the matter will become feeble and its profit earning

gift will in addition to slip.

(6) Legal Restriction-According to Sec. 205 of the Companies Act, 1956 dividend cannot be acknowledged without charging depreciation upon unqualified assets. Thus in "Case of joint growth companies charging of depreciation is compulsory.