Depreciation, Provisions and Reserves

period of time. The procedure for amortisation or periodic write-off of a portion of the cost of intangible assets is the same as that for the depreciation of fixed assets. For example, if a business firm buys a patent for Rs. , , and estimates that its useful life will be years then the business firm must write- off Rs.

, , over years. The amount so written- off is technically referred to as amortisation. These have been very clearly spelt out as part of the definition of depreciation in the Accounting Standard and are being elaborated here. .

. Wear and Tear due to Use or Passage of Time Wear and tear means deterioration, and the consequent diminution in an assets value, arising from its use in business operations for earning revenue. It reduces the asset’s technical capacities to serve the purpose for, which it has been meant. Another aspect of wear and tear is the physical deterioration.

An asset deteriorates simply with the passage of time, even though they are not being put to any use. This happens especially when the assets are exposed to the rigours of nature like weather, winds, rains, etc. Certain categories of assets lose their value after the agreement governing their use in business comes to an end after the expiry of pre-determined period.