Deprecesion

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Every fixed asset, such as machines, motor cars, furniture etc. normally depreciates in value over a period of time, irrespective of regular repairs and efficient management. A possible exception is made in respect of land because it has an indefinite useful life and its value tends to increase over a period of time.

Depreciation is nothing more than the written off value of the cost of an asset over its useful life. In general life, we often say that a car has been depreciated in value because value of such a car has declined as compared to the value of other cars available with the latest technology in the current market.

However, from accounting point of view depreciation is not a method of valuation and approximating current values such as replacement cost or resale values but a process of allocation of cost over the period of useful life of an asset.

For ascertaining the true cost in any business operation, depreciable amount of the depreciable asset is to be allocated over its useful life in such a manner that only true and fair values of the asset is shown in the balance sheet of the business enterprise. Here, we have used three important terms such as ‘depreciable asset, ‘depreciable amount’ and ‘useful life’.

Depreciable Amount:

Depreciable amount is the allocated value of the acquisition cost of the depreciable asset over its useful life. In real sense, it is an excess of total acquisition cost of the depreciable asset over the estimated residual value of the asset.

Depreciable Assets:

Depreciable assets are those assets which are expected to be utilised by the enterprise for more than one accounting period. These assets have a limited useful life and held by the enterprise for use in the enterprise for production or supply of goods and services, giving assets to others on rent basis and/or for administrative purposes but not for the purpose of sale in the ordinary course by the business enterprise.

Useful Life:

Useful Life of the asset is either:

(i) The period over which a depreciable asset is expected to be used by the enterprise or

(ii) The number of production or similar units expected to be obtained from the use of the asset by the enterprise.

It is worth mentioning that the useful life should not be confused with the physical life of the asset because may be an asset is physically available with the enterprise but it can not be used any more. So what is important is the useful life and not the physical life.

In other words, we can say that useful life is the economic life of an asset which is either the physical life of the asset before it wears out or the economic life of the asset before it becomes obsolete, whichever is shorter, because, due to rapid enhancement in software technology and decrease in cost of computers, many enterprises replace them much before they wear out physically.