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Accounting For Managers - Revenue Recognition

Meaning & Cause Of Depreciation

   Posted On :  26.01.2018 06:50 am

In common parlance depreciation means a fall in the quality or value of an asset. But in accounting terminology, the concept of depreciation refers to the process of allocating the initial or restated input valuation of fixed assets to the several periods expected to benefit from their acquisitions and use.

Depreciation accounting is a system of accounting which aims to distribute the cost or other basic value of tangible capital assets, less salvage (if any), over the estimated useful life of the unit (which may be a group of assets) in a systematic and rational manner. It is a process of allocation and not of valuation.

The international accounting standards committee (iasc) (now international accounting standards board) defines depreciation as follows: depreciation is the allocation of the depreciable amount of an asset over the estimated useful life. The useful life is in turn defined as the period over which a depreciable asset is expected to be used by the enterprise. The depreciable amount of a depreciable asset is its historical cost in the financial statements, less the estimated residual value. Residual value or salvage value is the expected recovery or sales value of the asset at the end of its useful life.

2.1.3.2 Causes Of Depreciation

 

Among other factors, the two main factors that contribute to the decline in the usefulness of fixed assets are deterioration and obsolescence. Deterioration is the physical process wearing out whereas obsolescence refers to loss of usefulness due to the development of improved equipment or processes, changes in style or other causes not related to the physical conditions of the asset. The other causes of depreciation are:

 

1.         Efflux of time – mere passage of time will cause a fall in the value of an asset even if it is not used.

2.         Accidents – an asset may reduce in value because of meeting with an accident.

3.         Fall in market price – a sudden fall in the market price of

4.         the asset reduces its value even if it remains brand new.

 

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