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Karnataka class 12 commerce Accountancy Meaning of depreciation

Karnataka class 12 commerce Accountancy Meaning of depreciation:

Karnataka class 12 commerce Accountancy Meaning of depreciation: Depreciation may be described as a permanent, continuing and gradual shrinkage in the book value of fixed assets. It is based on the cost of assets consumed in a business and not on its market value. According to Institute of Cost and Management Accounting, London (ICMA) terminology “ The depreciation is the diminution in intrinsic value of the asset due to use and/or lapse of time.” Accounting Standard-6 issued by The Institute of Chartered Accountants of India (ICAI) defines depreciation as “a measure of the wearing out, consumption or other loss of value of depreciable asset arising from use, effluxion of time or obsolescence through technology and market-change. Depreciation is allocated so as to charge fair proportion of depreciable amount in each accounting period during the expected useful life of the asset. Depreciation includes amortisation of assets whose useful life is pre-determined”.

Karnataka class 12 commerce Accountancy Meaning of depreciation:

Karnataka class 12 commerce Accountancy Meaning of depreciation

Karnataka class 12 commerce Accountancy Meaning of depreciation:

Depreciation has a significant effect in determining and presenting the financial position and results of operations of an enterprise. Depreciation is charged in each accounting period by reference to the extent of the depreciable amount. It should be noted that the subject matter of depreciation, or its base, are ‘depreciable’ assets which:

  • “are expected to be used during more than one accounting period;
  • have a limited useful life; and
  • are held by an enterprise for use in production or supply of goods and services, for rental to others, or for administrative purposes and not for the purpose of sale in the ordinary course of business.”

Karnataka class 12 commerce Accountancy Meaning of depreciation:

Examples of depreciable assets are machines, plants, furnitures, buildings, computers, trucks, vans, equipments, etc. Moreover, depreciation is the allocation of ‘depreciable amount’, which is the “historical cost”, or other amount substituted for historical cost less estimated salvage value. Another point in the allocation of depreciable amount is the ‘expected useful life’ of an asset. It has been described as “either (i) the period over which a depreciable asset is expected to the used by the enterprise, or (ii) the number of production of similar units expected to be obtained from the use of the asset by the enterprise.”

Karnataka class 12 commerce Accountancy Meaning of depreciation:

AS-6 (Revised): Depreciation  – Depreciation is “a measure of the wearing out, consumption or other loss of value of depreciable asset arising from use, effluxion of time or obsolescence through technology and market-change. Depreciation is allocated so as to charge fair proportion of depreciable amount in each accounting period during the expected useful life of the asset. Depreciation includes amortisation of assets whose useful life is pre-determined”.

  1. Depreciation has a significant effect in determining and presenting the financial position and results of operations of an enterprise. Depreciation is charged in each accounting period by reference to the extent of the depreciable amount.
  2. The subject matter of depreciation, or its base, are ‘depreciable’ assets which. • “are expected to be used during more than one accounting period. • have a limited useful life; and • are held by an enterprise for use in production or supply of goods and services, for rental to others, or for administrative purposes and not for the purpose of sale in the ordinary course of business.”
  3. The amount of depreciation basically depends upon three factors, i.e. Cost, Useful life and Net realisable value.
  4. Cost of a fixed asset is “the total cost spent in connection with its acquisition, installation and commissioning as well as for add item or improvement of the depreciable asset”.
  5. Useful life of an asset is the “period over which it is expected to be used by the enterprise”.
  6. There are two main methods of calculating depreciation amount. • straight line method • written down value method
  7. Selection of appropriate method depends upon the following factors: • type of the asset • nature of the use of such asset • circumstances prevailing in the business.
  8. The selected depreciation method should be applied consistently from period to period. Change in depreciation method may be allowed only under specific circumstances.

Karnataka class 12 commerce Accountancy Meaning of depreciation:

Depreciation and other Similar Terms –

There are some terms like ‘depletion’ and ‘amortisation’, which are also used in connection with depreciation. This has been due to the similar treatment given to them in accounting on the basis of similarity of their outcome, as they represent the expiry of the usefulness of different assets.

Depletion 

The term depletion is used in the context of extraction of natural resources like mines, quarries, etc. that reduces the availability of the quantity of the material or asset. For example, if a business enterprise is into mining business and purchases a coal mine for Rs. 10,00,000. Then the value of coal mine declines with the extraction of coal out of the mine. This decline in the value of mine is termed as depletion. The main difference between depletion and depreciation is that the former is concerned with the exhaution of economic resources, but the latter relates to the usage of an asset. In spite of this, the result is erosion in the volume of natural resources and expiry of the service potential. Therefore, depletion and depreciation are given similar accounting treatment.

Amortisation 

Amortisation refers to writing-off the cost of intangible assets like patents, copyright, trade marks, franchises, goodwill which have utility for a specified 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. 10,00,000 and estimates that its useful life will be 10 years then the business firm must writeoff Rs. 10,00,000 over 10 years. The amount so written- off is technically referred to as amortisation.

Karnataka class 12 commerce Accountancy Meaning of depreciation:

  • Karnataka class 12 commerce Accountancy CH1 DEPRECIATION PROVISIONS AND RESERVES

Karnataka class 12 commerce Accountancy Meaning of depreciation:

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