This preview shows pages 1–2. Sign up to view the full content.
This preview has intentionally blurred sections. Sign up to view the full version.View Full Document
Unformatted text preview: 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. Provision for depreciation in the profit and loss account does not involve the outflow of cash (as in the...
View Full Document
This note was uploaded on 11/15/2011 for the course ACCOUNTS 231 taught by Professor Majidkhan during the Winter '11 term at IIPM.
- Winter '11