Page 226 - DMGT104_FINANCIAL_ACCOUNTING

Financial Accounting

Notes 3. Revalued amounts substituted for historical costs of fixed assets, the method adopted to
compute the revalued amounts, the nature of indices used, the year of any appraisal made,
and whether an external valuer was involved, in case where fixed assets are stated at
revalued amounts.

10.2 Meaning and Definition of Depreciation on Fixed Assets

Depreciation means the fall or decrease in the value of assets. Depreciation is a permanent fall in
the value of depreciable assets on using in the operation of business. In the depreciable assets
land, forest, goodwill, livestock, R&D are not included. Depreciation is not visible like other
expenses of the business which are clear and considered at the time of calculation of profit/loss
of the business. But it is not so in the case of depreciation on assets. Its amount is also not fixed.
It is based on past experience. Some businessmen do not provide depreciation on assets and do
not deduct from the gross profit to calculate the net profit.
One thing we have to keep in our mind that depreciation is calculated on the fixed assets. And it
is charged against the profit to ascertain the net profit. Of course the current assets may lose their
values. Loss on account of valuation of current assets is calculated on the basis of cost or market
price whichever is less. Valuation of current asset is done for the purpose of balance sheet only.
Generally there is depreciation in all fixed assets due to some reasons. There are a few cases in
which the values of the assets appreciate as land, antiques and old paintings, etc. As per Accounting
Standard-6 the depreciable assets are those which:
1. Are expected to be used during more than one accounting period, and
2. Have a limited useful life, and
3. Are held by an enterprise for use in the production or supply of goods and services, for
rental to others, or for administrative purposes and not for the purpose of sale in the
ordinary course of business.

10.2.1 Definitions

In the AS-6 the depreciation is defined as, “Depreciation is a measure of wearing out, consumption
or other loss of value of a depreciable asset, arising from use, affluxion of time or obsolescence
through technology and market changes. Depreciation is allocated so as to change a fair proportion
of the depreciable amount in each accounting period during the expected useful life of the asset.
Depreciation includes amortisation of assets whose useful life is predetermined.”

As per International Accounting Standards Committees, “Depreciation is the allocation of the
depreciable amount of an asset over its estimated useful life. Depreciation for the accounting
period is charged to income either directly or indirectly”.
According to J.H. Burton, “Depreciation is the shrinkage in the value of an asset at a given date
as compared with its value at a previous date”.

From the above definition it is clear that depreciation is gradual fall in the value of the assets due
to some reasons.

10.2.2 Significance of Depreciation

Depreciation is provided in the books from the following point of view:
1. To present the assets at its true value in balance sheet: Depreciation is computed on the
fixed assets. It is shown against the fixed assets in the balance sheet. By doing so the

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