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Depreciation

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Depreciation is a permanent, continuous and gradual decline in the value of fixed assets due to wear and tear or passage of time. It is treated as an expense or loss. It is a non-cash revenue expense and charged in profit and loss account. It is quality, quantity or value deterioration of fixed assets because of their constant use.

“Depreciation is the permanent and continuing diminution in the quality, quantity or value of an asset.” – William Pickles

“The allocation of the original cost of plant, property and equipment to the particular periods or products that benefit from the utilization of assets.” – C.T. Horngren

From the above definition, it is apparent that depreciation is the constant reduction in the value of fixed assets possessed by the business due to their constant use.

Causes

Depreciation is the fall or decrease in the value of fixed assets. The following are the main causes of depreciation:

  • Wear and tear
    Wear and tear refer to the decline in the efficiency of an asset due to its constant use. When an asset loses its efficiency, its value falls down thus depreciation arises.

  • Elapse of time
    There are certain fixed assets such as intangible assets such as patent right, copyright, etc. whose value decline due to the passage of their time, even if they are not put in use. The decline in the value of such assets due to elapse of time is called ‘amortization’.

  • Exhaustion
    A fixed asset such as mine may lose its value as minerals are exploited from there. Thus, the decline in the value of such fixed assets is called ‘depletion’.

  • Obsolescence
    Some fixed assets become obsolete because of change in technology, fashion and consumers’ tastes and preferences. As a result, they are discarded as they lose their values.

  • Other causes
    Besides, there may be other causes of depreciation of fixed assets such as accident and fall in their market value.

Need for providing depreciation

The need for providing depreciation arises due to the following reasons:

  • Ascertaining true profits
    When fixed assets like machines are used for the production of goods and services, they are gradually worn out and consequently their values go down. The fall in the value of fixed assets due to their constant use is an operating expense for a business.

  • Reporting true financial position
    The value of fixed assets decrease over time due to some reasons. In order to report the true financial position of the business, it is essential to provide depreciation fixed assets to show their true values in the balance sheet.

  • Replacement of assets
    Fixed assets have fixed operating lives. After their lives are over, they are fully out of use. Therefore, it is essential to replace fully worn out assets, as business is a going concern. Depreciation provided on fixed assets is set aside and used as a source of fund when they need replacement.

  • Paying fair taxes
    The profit ascertained without the provision for depreciation on fixed assets is not true and taxes paid to the government on such profit is not fair. Therefore, it is essential to provide depreciation on fixed assets to pay fair amount of tax to the government.



  • Depreciation is a permanent, continuous and gradual decline in the value of fixed assets due to wear and tear or passage of time.
  • The value of fixed assets decrease over time due to some reasons.
  • Wear and tear refers to the decline in the efficiency of an asset due to its constant use.
  • It is essential to provide depreciation on fixed assets to pay fair amount of tax to the government.
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Very Short Questions

Solution:

Date

Particulars

Amount

Date

Particulars

Amount

1995-1-1

To bank a/c

10,000

1995-12-31

By depreciation a/c

2,000

By balance c/d

8,000

10,000

10,000

1996-1-1

To balance b/d

8,000

1996-12-31

By depreciation a/c

2,000

By balance c/d

6,000

8,000

8,000

1997-1-1

To balance b/d

6,000

1997-12-31

By depreciation a/c

1,000

To gain on sales

500

By bank a/c

5,500

6,500

6,500

Solution:

Dr.

Machinery a/c

Cr.

Date

Particulars

Amount

Date

Particulars

Amount

2009-01-01

To Bank a/c

50,000

2009-12-31

By depreciation

5,000

By balance c/d

45,000

50,000

50,000

2010-01-01

To balance b/d

45,000

2010-12-31

By depreciation

5,000

By balance c/d

40,000

45,000

45,000

2011-01-01

To balance b/d

40,000

2011-12-31

By bank a/c

40,000

To bank a/c

50,000

By depreciation of sold machine

2,500

To profit on sales

2,500

By balance c/d

50,000

92,500

92,500

2012-01-01

To balance b/d

50,000

Solution:

Dr.

Machinery a/c

Cr.

Date

Particulars

Amount

Date

Particulars

Amount

2009-01-01

To bank a/c

80,000

2009-12-31

By depreciation a/c

8,000

By balance c/d

72,000

80,000

80,000

2010-01-01

To balance b/d

72,000

2010-12-31

By depreciation a/c

10,200

To bank a/c

60,000

By balance c/d

1,21,800

1,32,000

1,32,000

2011-01-01

To balance b/d

1,21,800

2011-12-31

By depreciation a/c

12,180

To bank a/c

1,20,000

By balance c/d

2,26,620

2,41,800

2,41,800

2012-01-01

To balance b/d

2,26,620

Solution:

Dr.

Machinery a/c

Cr.

Date

Particulars

Amount

Date

Particulars

Amount

2003-07-01

By bank a/c

80,000

2003-12-31

By depreciation a/c

8,000

By balance c/d

72,000

80,000

80,000

2004-07-01

To balance b/d

72,000

2004-12-31

By depreciation a/c

14,400

By balance c/d

57,600

72,000

72,000

2005-07-01

To balance b/d

57,600

2005-12-31

By depreciation a/c

11,520

By balance c/d

46,080

57,600

57,600

2006-07-01

To balance b/d

46,080

2006-12-31

By depreciation a/c

6,912

By bank a/c

32,000

By balance c/d

7,168

46080

46080

Solution:

Dr.

Machinery a/c

Cr.

Date

Particulars

Amount

Date

Particulars

Amount

1995-01-01

To bank a/c

45,000

1995-12-31

By depreciation a/c

4,500

By balance c/d

40,500

45,000

45,000

1996-01-01

To balance b/d

40,500

1996-12-31

By depreciation a/c

10,050

By balance c/d

90,450

1,00,500

1,00,500

1997-01-01

To balance b/d

90,450

1997-12-31

By bank a/c

22,000

By depreciation a/c

9,045

By profit and loss a/c

10,085

By balance c/d

48,600

90,450

90,450

1998-01-01

To balance b/d

48,600

0%
  • Depreciation is a ______ decline in the value of fixed assets due to wear and tear or passage of time. 

    permanent
    gradual
    All the options are correct
    continuous
  •  Depreciation is the permanent and continuing diminution in the quality, quantity or value of an asset. Who gave this definition?

    J.R batiliboi
    L.H. Hanry
    S.P Arora
    William Pickles
  •  The allocation of the original cost of plant, property and equipment to the particular periods or products that benefit from the utilization of assets. Whose saying is this?

    C.T. Horngren
    William Pickles
    L.H. Hanry
    A.N. Anthony
  • Which one of them is the feature of depreciation?

    Exhaustion
    Elapse of time
    All the options are correct
    Wear and tear
  • Which one of them is the need for providing depreciation?

    Paying fair taxes
    Ascertaining true profits
    Reporting true financial position
    All the options are correct
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