Depreciation

Introduction
As you aware, there various types of fixed assets that are used in business.
Some of these assets like land do not depreciated. Some other assets like
building,plant and machinery, etc are those that depreciate in value due to use
and other. This standard discusses how accounting for depreciation is to be
done and applies to all such depreciable assets.Since different accounting
policies are adopted for depreciation by different enterprises.Adequate disclose
of these policies is necessary for facilitating better comparion and
understanding of financial statements.

Definition:
Depreciation is defined as a measure of wearing out, i.e. wear-n-tear consumption
or other loss of value of a depreciable asset arising from use,efflux of time or
obsolescence
Through technology and market changes. When the cost of depreciable asset is
spread over or allocated over its useful life, it is nothing but depreciastion.

Methods of Depreciation
1) Straight line methode or Fixed instalment method (SLM)
2) Reducing balance method or written down value method (WDV)

1) Under this system, as the very name suggests, a fixed sum (out of
the total cost of the asset) is written off evey year. At the end of its
life, the balance in that asset account will be equal to its estimated
residuary value or disposal value or scape value.

ADVANTAGES:
1) This method is simple to understand. The calculation are also simple
2) The value of the asset at the end of its life will be estimated scape
value
3) The annual charge of depreciation made to profit and loss accounts is
eual in all the year and, therefore ther is equity. However, this in fact,
is adefect of this method

DISADVANTAGES:
1) This method creates complications in respect of depreciation on a
Addition to the assets during the year. It requires separate working
for cost of different items,
 2) Equal depreciation is charged every year. But as the year pass by
The cost of repairs and renewals increase and, therefore, aggregate of
depreciation and repair will go on increasing evry year. But if the
depreciation is more in the earlier year and less in the later years.
3) This method is not recognized by the income tax Act,1961.

Reducing Balance Method or written down value method

Under this method, the depreciation is written off on the reduced balaence of the asset.
Thus, depreciation in the earlier years will be more as comapared to the depreciation in
the last years. In the earlier years the repairs are less and in later years repairs are more.
Taken together, the aggregate charge to profit or loss accountwill be equated over the
years.

Advantages of WDV Method:

1) the total charge for depreciation and repairsto profit and loss account
of various years is equated over the life of the asset.
2) Thid method is recognized by the business world. Subject certain
regulation and modification, the method is recognized by the income
tax law of the country. Thus, this method id widely followed.
3) Different calculations for each of the items of addition are necessary,
as the depreciation ids to be calculated by the company law.
4) The asset would never be completely written off and hence it will
always remain in the books. This will help the management in keeping
track of the asset.

Disadvantages of WDV method:

1) The book value of the asset never becomes under this method.
2) It is very difficult to ascertain correct rate of depreciation so as to
written off the asset more or less within its useful life.
Causes of depreciation
The cause of deoreciation may be divided into four classification:
1)Physical deteroration(wear and tear)
2) Economic factor
3) Time factor
4) depletion.