DEPRECIATION:
Definition: The monetary value of an asset decreases over time due to use, wear and tear or obsolescence. This decrease is measured as depreciation.
Description: Depreciation, i.e. a decrease in an asset's value, may be caused by a number of other factors as well such as unfavorable market conditions, etc. Machinery, equipment, currency are some examples of assets that are likely to depreciate over a specific period of time. Opposite of depreciation is appreciation which is increase in the value of an asset over a period of time.
Accounting estimates the decrease in value using the information regarding the useful life of the asset. This is useful for estimation of property value for taxation purposes like property tax etc. For such assets like real estate, market and economic conditions are likely to be crucial such as in cases of economic downturn.
OBJECTIVE:
Main objectives of providing depreciation are to calculate proper profits, show the asset at its reasonable value. To maintain the original monetary investment of the asset intact and have some incidental advantages, provide for replacement of an asset and finally to have tax advantage.
Depreciation may happen due to two reasons internal and external reasons. Internal may be wear and tear, lack of proper maintenance, change in production format, restriction of production, reduction to demand of the product produced by the asset, technical progress, depletion and unuse of the same.
External Reason may be due to Obsolescence which is induced by new inventions, improvement, loss of demand due to change in fashion and effluxion of time. Steps in measurement of depreciation include reduction of total depreciation, spreading it over the economic life of the asset. Depreciation depends on following factors total cost of asset which includes the invoice cost, less any cash discount, plus all costs essential to bring the use able condition. Estimated useful service life or economic life and its estimate residual value. Residual value is an estimated sale value of the asset at the end of its life to the business. Estimated residual value should be estimated after deducting the disposal and removal cost. Depreciation accounting deals with cost allocation and not with its valuation.
Definition: The monetary value of an asset decreases over time due to use, wear and tear or obsolescence. This decrease is measured as depreciation.
Description: Depreciation, i.e. a decrease in an asset's value, may be caused by a number of other factors as well such as unfavorable market conditions, etc. Machinery, equipment, currency are some examples of assets that are likely to depreciate over a specific period of time. Opposite of depreciation is appreciation which is increase in the value of an asset over a period of time.
Accounting estimates the decrease in value using the information regarding the useful life of the asset. This is useful for estimation of property value for taxation purposes like property tax etc. For such assets like real estate, market and economic conditions are likely to be crucial such as in cases of economic downturn.
OBJECTIVE:
Main objectives of providing depreciation are to calculate proper profits, show the asset at its reasonable value. To maintain the original monetary investment of the asset intact and have some incidental advantages, provide for replacement of an asset and finally to have tax advantage.
Depreciation may happen due to two reasons internal and external reasons. Internal may be wear and tear, lack of proper maintenance, change in production format, restriction of production, reduction to demand of the product produced by the asset, technical progress, depletion and unuse of the same.
External Reason may be due to Obsolescence which is induced by new inventions, improvement, loss of demand due to change in fashion and effluxion of time. Steps in measurement of depreciation include reduction of total depreciation, spreading it over the economic life of the asset. Depreciation depends on following factors total cost of asset which includes the invoice cost, less any cash discount, plus all costs essential to bring the use able condition. Estimated useful service life or economic life and its estimate residual value. Residual value is an estimated sale value of the asset at the end of its life to the business. Estimated residual value should be estimated after deducting the disposal and removal cost. Depreciation accounting deals with cost allocation and not with its valuation.
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