Depreciation

Posted in Finance, Accounting and Economics Terms, Total Reads: 1180
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Definition: Depreciation

It is the amount appropriated from the value of the fixed assets due to the following reasons: -

  • Obsolescence
  • Decrease in fair value
  • Wear and Tear
  • Impairment
  • Decrease in the life of the asset

Charging depreciation ensures that the fixed assets are not shown at an inflated value in the balance sheet. It also ensures that an appropriate amount is kept aside for future replacement of the fixed assets. The amount of depreciation is charged in the profit and loss account. It is a tax-deductible expense.

The fixed assets are shown in the balance sheet at their “NET AMOUNT”, i.e. Gross amount (-) Depreciation.

There are basically 2 methods of depreciation: -

  1. Straight line Method (SLM)
  2. Written down value (WDV)

 

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