DEPRECIATION

Depreciation may be defined as the decrease in the value of an asset on account of natural wear and tear and /or lapse of a period of time.The value of an asset goes on diminishing because of constant use.The amount by which the cost or book value of an asset goes down is known as depreciation.

The provision of depreciation is necessary to keep the capital intact and to make provision for the replacement of asset in future.

If depreciation is not provided the assets will be shown of higher values in the Balance Sheet and will not show true and fair picture.

The real object of providing the depreciation is to keep the assets intact by distributing the loss in its value over a number of years.

Use of asset in production should form a part of the cost of production as much as other expenses are.that is the depreciation should be added in the cost of production to get accurate cost of production of an article.

From legal point of view , it is necessary to provide for depreciation.. The companies act  provides for depreciation before distribution of profits.

The amount of depreciation of a fixed asset is determined taking into account the following three factors.

1. Its original cost
2. Its recoverable cost at the time it is retired from service and
3. Length of its life.

Out of this three factors the only factor is accurately know is its original cost.The other two factors cannot be determined until the asset is retired.These must be estimated at the time of asset is placed in service.

Methods Of Depreciation:-

1. Straight line method
2. Units of production method
3. Diminishing balance method
4. Sum-of-the-years-digits method

It not necessary that and enterprise employ a single method of calculating depreciation for all classes of its depreciable assets.But accordance with the convention of consistency ,once a method of depreciation is selected the same method should be followed throughout.

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