DEPRECIATION – IT’S PROS AND CONS
Introduction
The term “Depreciation” is used to denote the reduction in the monetary value of an asset class due to
• Wear and tear, obsolescence or price decline.
• Reduction in the value of a currency due to economic, social or security reasons.
The core connotation of the term “Deprecation” is reduction in value. This term is widely used in two contexts
• Accounting.
• Finance.
In the accounting context, depreciation is usually associated with the reduction in the value of a wasting asset usually
• Plant and Machinery, Tools and implements, Furniture and fixtures, etc.
• Buildings.
Such reduction in value transpires due to
• Wear and tear occurring due to usage
• Obsolescence – due to introduction of new or
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of years depreciation has been charged. Step C
D - Depreciation per annum = X Step B Step A
• Unit of Activity – Under this method the depreciation charge is calculated on the basis of expected output or usage. Under this method no depreciation is charged when the machine remains in an idle/unproductive state. This method is similar to straight line method with the exception that the asset life is estimated in terms of machine hours or the number of operations.
No. of Units Produced
Depreciation per annum = X (Cost – Scrap Value) Life in No. of Units
Conclusion