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The Concept of Depreciation

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American Accounting Association describes depreciation as, ” Any decline in the service potential of plant and other long term assets should be recognized in the accounts in the periods in which such decline occurs. The service potential of assets may decline because of gradual or abrupt physical deterioration, consumption of service potential through use even though no physical change is apparent, because of obsolescence or a change in consumer demand. So this definition takes only valuation of assets.”

Institute of Chartered Accountants in Austria says, ” Depreciation represents that part of the cost of a fixed asset to its owner which is not recoverable when asset is finally put out of use by him. Provision against this loss of capital is an integral cost of conducting the business during the effective commercial life of the asset and is not dependent upon the amount of profit earned.”

Indian Accounting Standard – 6 (AS-6) which was revised in August 1994 and was mandatory in respect of accounts for periods commencing on or after 1.4.1995 defines,” Depreciation is a measure of wearing out, consumption or other loss of value of a depreciable asset arising from use, effluxion of time or obsolescence through technology and market changes. Depreciation is allocated so as to charge a fair proportionvof the depreciable amount in each accounting period during the expected useful life of the asset. Depreciation includes amortization of assets whose useful life is predetermined.”

AS-6 also explains the word depreciable assets as assets which:

  1. Are expected to be used during more than one accounting period;
  2. Have a limited useful life;
  3. Are held by an enterprise for use in production or supply of goods and services, For rentals to others, or for administrative purposes
  4. Not for the purpose of sale in the ordinary course of business.

According to FRS-15, The Accounting Standard of United Kingdom and Republic of Ireland, ” The fundamental objective of depreciation is to reflect in operating profit the cost of use of the tangible fixed assets (i.e. the amount of economic benefit consumed by the entity) in the period. Therefore, the depreciable amount (i.e. cost or revalued amount, less residual value) of a tangible fixed asset should be recognized in the profit and loss account on a systematic basis that reflects as fairly as possible the pattern in which the asset’s economic benefits are consumed by entity, over its useful economic life.” (Summary paragraph FRS-15).

Further following are the words of Australian Accounting Standard (AASB-1021) on Depreciation, ” The depreciable amount of a depreciable asset must be allocated on a systematic basis over its useful life. The depreciation method applied to an asset must reflect the pattern in which the asset’s future economic benefits are consumed or lost by the entity. The allocation of the depreciable amount must be recognized as an expense, except to the extent that the amount allocated is included in the carrying amount of another asset.” (paragraph 5.1 AASB-1021 Australia)

United States Supreme Court, in Lindheimer vs. Illnois Bell Telephone Company case, defines depreciation,” Broadly speaking, depreciation is the loss, not restored by current maintenance, which is due to all factors causing the ultimate retirement of property. These factors embrace wear and tear, decay, inadequacy and obsolescence. Annual depreciation is the loss that takes place in a year.”

Whereas Statement of Standard Accounting Practice (SSAP-12) says, “Depreciation is a measure of the wearing out, Consumption or other permanent loss of value of fixed assets whether arising from Use, Efflux of time or Obsolescence through Technological or Market changes. Depreciation should be allocated so as to charge a fair proportion of cost or valuation, to each accounting period expected to benefit from the use of an asset.”

In the words of Anthony and Reece, ” With the exception of land, most items of plant and equipment have a limited useful life; that is, they will provide service to the entity over a limited number of future accounting periods. A fraction of the cost of the asset is therefore properly chargeable as an expense in each of the accounting periods in which the asset provides service to the entity, the accounting process for this gradual conversion of plant and equipment capitalized cost into expense is called depreciation.

Depreciation expense does not represent the shrinkage in the real value during the accounting period, physically the machine may be useful and as valuable at the end of the period as it was at the beginning. Neither does the net book value represent the market value of the assets on hand. Depreciation expense is a write off of a portion of the cost of asset, and it follows that the net book value of fixed assets reported on the balance sheet represents only that portion of the original cost of fixed asset which has not yet been charged to expense.”

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The Concept of Depreciation. (2018, October 26). GradesFixer. Retrieved October 31, 2020, from https://gradesfixer.com/free-essay-examples/the-concept-of-depreciation/
“The Concept of Depreciation.” GradesFixer, 26 Oct. 2018, gradesfixer.com/free-essay-examples/the-concept-of-depreciation/
The Concept of Depreciation. [online]. Available at: <https://gradesfixer.com/free-essay-examples/the-concept-of-depreciation/> [Accessed 31 Oct. 2020].
The Concept of Depreciation [Internet]. GradesFixer. 2018 Oct 26 [cited 2020 Oct 31]. Available from: https://gradesfixer.com/free-essay-examples/the-concept-of-depreciation/
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