Meaning of Depreciation in accounting with the Objectives, the causes and Methods of depreciation.

Depreciation

Depreciation refers to the decline of the value of any kind of property due to use, normal wear and tear, obsolescence or efflux ion of time. Depreciation of any kind of assets or property are allocated so as to charge a reasonable proportion of the depreciable amount in each accounting period during the expected useful life time of the asset.

Objectives  of providing Depreciation

The main objective of providing depreciation to the concerned property are as follows:-

1.      To ascertain true profit of the business.

2.      To show the proper value of assets.

3.      To retain the capital In tact.

4.      Provision of depreciation is a statutory need for the business.

Causes of Depreciation of Assets

The main reasons for the depreciation of the value of assets are as follows:-

1.      Physical Deterioration which includes normal wear and tear, rust of assets without using, wind, rain, sun and other elements of nature.

2.      Economic Factors like Obsolescence and inadequacy.

3.      Time factors which includes the reduction of value simply by passing of time.

4.      Depletion which means the lose of value due to the use such as coal mines, ore and oil deposits etc.

Methods of Depreciation

To find out the depreciation of assets or any kind of property, there are different forms or kinds of methods are available. The different kinds of depreciation methods are as follows:-

1)      Fixed Installment or Straight line method.

2)      Diminishing Balance or written down value method.

3)      Sums of the digit method

4)      Annuity method

5)      Depreciation fund or Sinking fund method

6)      Insurance policy method

7)      Revaluation method

8)      Activity method

1.      Fixed Installment or Straight line method.

Under this method, an equal amount of the value of asset is allocated as depreciation in each accounting year over a period of its effective life time. The depreciation will be calculated up to the salvage of the value of assets.

2.      Diminishing Balance or written down value method.

Under this system, depreciation will be calculated as a certain percentage of the value of the assets. This will be shown as reduced in the books of depreciation.

3.      Sums of the digit method.

Under this system, uses a constantly reducing rate to calculate the depreciation of assets. This is similar to the straight line method which means, this uses a constant system to calculate the value of assets. This uses some digits to find out the amount of depreciation in each year.

4.      Annuity method.

Under this system, the purchase amount is assumed as the investment and the interest from that investment also will be considered in the case of calculation of depreciation of assets.

5.      Insurance policy method

Under this system, an insurance policy will be taken for the assets and this matures when the assets are replaced.

6.      Revaluation method

Under this system, the reduction of the value of assets will be treated as the depreciation for the concerned assets.

7.      Activity method.

Under the activity method, usage of assets is given more importance than the passage or efflux ion of time for assets of any kind of property. The activity may take place in different forms or kinds they are as follow;

·        Production Unit Method

·        Machine Hour Method

·        Service Unit Method

·        Depletion Method.

These all are the different kinds of Method of Depreciation.