DEPRECIATION ACCOUNTING Learning Objectives To enable the students to Understand the meaning and causes of depreciation Understand the various methods of providing depreciation Apply the different methods of depreciation and prepare asset account Points to recall The following points are to be recalled before learning the depreciation accounting: The going concern concept The matching concept Meaning of fixed assets Tangible assets and intangible assets Key terms to know • Depreciation • Provision for depreciation • Scrap value/residual value • Book value • Straight line method • Diminishing balance method Accountancy . Introduction Think: Mr. Nihal bought a car for ` , , . After four years he wanted to sell it for more than ` , , .
Is it possible? Why do you think that it is possible/it is not possible? Student activity Business enterprises use certain fixed assets for the conduct of business operations. Such assets are building, plant and machinery, motor vehicles, furniture, office equipment, etc.
These assets have a long span of life. After some years, the assets will lose their usefulness for the business operations. Purchase of such fixed assets or construction of these is a capital expenditure. Hence the amount cannot be transferred to profit and loss account of the year of purchase.
But every year, a part of the capital expenditure attributable to the use during the year is charged to profit and loss account and is reduced from the cost of the asset. The portion of cost of asset attributable to the use and expiry of time is to be measured and accounted which is called depreciation. Depreciation is treated as a charge against profit and is debited to profit and loss account. .
Depreciation - Meaning and definition The process of allocation of the relevant cost of a fixed asset over its useful life is known as depreciation. It is an allocation of cost against the benefit derived from a fixed asset during an accounting period. According to Spicer and Pegler , “Depreciation is the measure of exhaustion of the effective life of