Depreciation

Depreciation  is  a measure of the wearing out, consumption  or other loss of value of a depreciable asset arising from use,effluxion of time or obsolescence through    technology  and market    changes.Depreciation  is  allocated  so  as  to  charge  a  fair  proportion  of  the depreciable  amount  in  each  accounting  period  during  the  expected useful  life  of  the  asset.  Depreciation  includes  amortisation  of  assets whose  useful  life  is  predetermined. (Indian Accounting standard 6).

Objectives of Providing Depreciation

1. To Find out net profit or loss for an accounting period, the expenses includes the portion of cost of fixed assets that has expired during the period. Unless depreciation is charged , the true profit of particular period cannot be ascertained.

2. Unless the depreciation is charged, the assets may be overstated in the balance sheet.Hence, the value  at which the fixed assets will be shown in the balance sheet is its original cost less the amount charged as depreciation.This value called written down value.

3. In order to replace the asset.If the depreciation not charged and profit available for distribution not reduced, it is quite likely that the whole of the profit may be withdrawn during the life of the asset.In such case, the business unit may not have sufficient funds left for replacement.