Page 129 - DCOM101_FINANCIAL_ACCOUNTING_I

Unit 11: Depreciation Accounting

11.1 Meaning of Depreciation Notes

According to Dickens, Depreciation is the permanent and continuous diminution in the quality/
quantity/value of the asset.

In simple words, depreciation is the permanent decrease in the value of the fixed assets. It is a
matching in between the fixed charge expense against the current year’s revenue.

The remaining/left which is the un-recovered portion should be carried forward to forthcoming
years in order to match against the respective revenues. The ultimate purpose of the depreciation

is to replace the fixed assets only at the moment of becoming useless through the current
revenues.
?

Did u know? What are the items which are not covered under fi xed assets?
Under the fixed assets the following items are not considered on which special considerations

apply:
1. Forests, plantations and similar regenerative natural resources,
2. Wasting assets including mineral rights, expenditure on the exploration for and
extraction of minerals, oil, natural gas and similar non-generative resources,
3. Expenditure on real estate development, and
4. Livestock.

Notes Reasons for Depreciation
1. Wear and Tear of the Asset: The long term assets are becoming less efficient and poor

quality in operations due to the continuous usage of the asset.
2. Exhaustion: Nothing will be left due to the continuous extraction of resources. The
resources in the oil wells, mine fi elds will be completely exhausted due to incessant
extraction. This has to be replaced by a new method of exploration. Investment in
new exploration methods requires depreciation as a charge against the revenues of
the wells/fi elds.
Example: Oil & Natural Gas Corporation Ltd. (ONGC) indulges in the process of
new oil exploration projects through research projects. The new projects should then

be identified and invested by huge initial investment outlay through the current
revenues out of the existing projects on account of replacement due to depletion of
resources.
3. To face technological obsolescence: To replace the old machinery with new machinery,
before the expiry of the economic life period of the asset in order to maintain the
efficiency and economy of the asset. The typewriter was replaced by the electronic

typewriter during the yester periods of office automation. To replace the old typewriter

which is neither efficient nor economical, it should be replaced by the new electronic
typewriter through the depreciation charge on the old one.

4. Accident: The value of the asset mainly depends upon the efficiency and economy;
which gets affected due to accident.

LOVELY PROFESSIONAL UNIVERSITY 123