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Depreciation Accounting

Depreciation Accounting - Depreciation Accounting .

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Depreciation Accounting The primary meaning of the word ‘depreciation’ is the fall in the quality or value of fixed asset   through physical wear and tear in use or passage of time or depletion or obsolescence Depreciation does take place irrespective of regular repairs and efficient maintenance . It is important  to mention that fall in the value means a fall in the book value that is cost minus depreciation.  Depreciation is reduction in the book values of tangible fixed assets and such reduction is permanent,  gradual and of continuing nature. Depletion, Amortization and Obsolescence : In a broad sense, the term depreciation covers depletion, amortization and obsolescence. However these  terms are used in a particular context.  The term depletion  is used in relation to natural resources or wasting assets such as quarries, mines, oil  wells etc, indicating their physical deterioration or exhaustion of natural resources. As the resource is  extracted or removed from the land, its assets value would be reduced or exhausted. This reduction in  the value of asset resulting from production is called depletion. The term amortization  refers to loss of economic value of intangible assets like patents, trade marks,  goodwill, copy rights and the like. Some intangible assets have limited useful life and are therefore  written off and removed from the list of assets. The term obsolescence  refers to the decline in the economic value of asset due to such factors as the  invention of new techniques or equipment, change the taste or fashion etc, or inadequacy of the  existing fixed asset to produce more for increased demand. Accounting Standard 6: AS 6 speaks that depreciation is a measure of the wearing out, or other loss of value of a depreciable   asset arising from use, time or obsolescence . Depreciation is allocated so as to charge a fair proportion  of the cost in each accounting period during the expected useful life of the asset. Depreciation includes  amortization.
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