assets may be stopped due to their inadequacy for the purpose. These may become inadequate due to expansion in the capacity of a firm. (v) Lack of maintenance A good maintenance will naturally increase the life of the asset. When there is no proper maintenance, there is a possibility of more depreciation.
Accountancy (vi) Abnormal factors Decline in the usefulness of fixed asset may be caused by abnormal factors like damage due to fire accidents, natural calamities, etc. These may even lead to the state of an asset being discarded. . Characteristics of depreciation Following are the characteristics of depreciation: i.
Depreciation is the process of allocation of cost of depreciable asset (capital expenditure) to revenue expenditure or to profit and loss account over the useful life of the asset. ii. It is the process of allocation of cost and not the process of valuation. iii.
It is a decrease in the book value of the asset and not the market value of the asset. iv. It is a gradual and continuous decrease in the book value of asset over its useful life. v.
It is calculated only for tangible depreciable fixed assets. Depreciation is not provided on intangible and wasting assets. Allocation of acquisition cost of natural resources such as mineral deposits, oil well, coal, timber is called depletion. Allocation of acquisition cost of intangible fixed assets such as goodwill, patents, copyrights, trademarks, and intellectual property rights is called amortization.
. Factors determining the amount of depreciation There are different factors that determine the amount of depreciation to be provided on a fixed asset. They are as follows: (i) Actual cost of the asset Actual cost means the amount incurred in acquiring or constructing the asset. It is the acquisition or construction cost or historical cost.
It includes all the expenses incurred on the asset to bring the asset to present condition and location, that is, all incidental expenses incurred till it is put into use. Purchase price of the asset, freight, loading charges, unloading charges, erection cost, setting up cost and expenses