What do you mean by depreciation?
It is a
permanent, continuous and gradual decline in the value of fixed asset. It is
treated as expenses or losses. It is non cash and revenue expenses and charged
in profit and loss account.
What are the causes of depreciation?
The
major causes of depreciation are as follows.
Wear and tear: Value
of fixed assets like plant and machinery, furniture and fixtures etc. decreases
because of their continuous use in the business. Besides, assets get worn out
due to constant use and hence, efficiency of assets decreases.
Expiration of time: Some
assets, for example, Lease, Patents, copy right etc. which lose their value
with the expiration of time irrespective of the fact whether assets are used or
not.
Exhaustion: Value
of natural resources like mines, quarries, oil. Such type of reduction in value
of asset is also called depletion. In other words, depletion can be defined as
a process of allocating the cost of natural resources.
Obsolescence: The obsolescence of
an asset is the decline in usefulness by inventions and technological progress.
Due to new inventions old assets may have to be scraped off even though they are
capable of providing economic benefit.
Methods of Charging
Depreciation
There are different methods which are used for the application
of concept of depreciation to fixed assets. The choice of method would depend
upon the pattern of expected benefits obtainable in each period from its use.
The various methods of depreciation are as follows:
·
Diminishing balance method
·
Sum of years' digit method
·
Double declining balance method
·
Machine hour rate method
·
Production unit method
·
Annuity method
·
Depreciation fund method
·
Insurance policy method
·
Sinking fund method
·
Revaluation method
According to syllabus, only fixed installment method and
diminishing balance method are prescribed. So only these two methods are
explained in this chapter
Depreciation for Class XI
Straight
Line Method
The straight line method is the most widely
used method of depreciation because of its simplicity. This method of
depreciation allocates cost of an asset every year over its useful life
Diminishing Balance Method
Under diminishing balance method, a fixed percentage of depreciation is charged each year on the written down value or book value of an asset at the beginning of an accounting period. Salvage value is ignored in making the calculations of amount of depreciation.
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