The Depreciation

DEPRICIATION

"Depreciation is a reduction in the value of an asset due to constant use of the same, which is called wear and tear." Fixed assets, like buildings, plant, machinery, furniture etc., are subject to depreciation. Whenever, an asset is depreciated, its value goes down and therefore it is a loss to the organization. Depreciation expense is an accounting and financial reporting practice, used primarily by businesses that pay tax on income. On the income statement, depreciation expense appears as a charge against income, i.e. It is subtracted from sales revenues to produce a lower reported income (lower profit, lower earnings). Depreciation account is debited and the concerned asset account is credited. The item of depreciation may appear in the trial balance, which means that already the concerned asset is reduced by the amount of depreciation. If depreciation is given as an additional adjustment, then the depreciation amount should be charged against profit & loss account on the one hand and the concerned asset account is reduced on the other hand in the balance sheet.

Depreciation provides a way to account for the purchase of long-lasting assets over a period of years. The idea is that assets have a useful life (depreciable life), over which they are used up or worn out, and that the owner receives the tax benefits of paying for the asset over those years instead of all at once.

There are two popular methods of depreciation:

1.  Fixed installment method: - In fixed installment method which is also called as “Straight Line Method”, depreciation is calculated on the cost of the asset. The depreciation charged remains same throughout the life of the asset. One main characteristic of this method is, the value of the asset becomes zero at the last and this is also called a drawback of this method because any asset could not be of zero value even after the complete damage.
2. Reducing balance method: - This method is also known as “Written down Value Method” and “Diminishing Balance Method” and in this case, the depreciation is charged on the reducing balance of the book value of the asset. The depreciation amount gets reduced year after year during the life of the asset and the value of the asset never becomes zero, so that, this method is more popular and well recognized.