Depreciation is a reduction value or lost usefulness or expired utility or a permanent fall in the value of fixed assets arising through wear and tear from the utility of those assets in business and includes amortization of assets whose useful life is predetermined. Accounting procedure or process of converting the cost of fixed assets to expense is known as depreciation. It determines and presents the financial position and results of expectations of a firm. Accounting process of converting intangible assets to expenses if called amortization.
Main objectives of providing depreciation are to calculate proper profits, show the asset at
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 useable 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.