The lifetime of a device is primarily for acquisition and secondary purposes, by its very nature. The item acquired for immediate consumption or sale is a short-lived asset that is used for long-term use, a long-lived asset, though both generate income. While the previous device expires within one year from the date of purchase, the latter device lasts longer. Thus, almost total expense for the short-lived asset becomes cost-intensive, and it is paralleled by the revenue of the current year.
But the position is otherwise a long-lasting tool that is worn out or slipped for longer. Accordingly, a fixed capital expense is spread over several years, and only a fraction of a year is expired. Simply this fraction, which is termed expense or amortization, charges current revenues and the remainder is considered to be an expired expense, and can be transferred at later maturity.
"Determining Depreciation is a Constant Reduction of the Value of an Instrument by Use and / or Time Out." -The Terminology of the Budget Manager Institute, England
"Depreciation is a continuous and continuous decrease in the quality, quantity or value of the asset." -Pickles
"Depreciation can be determined by the depletion of the asset's actual lifetime for any reason over a given period." -Spicer and Pegler
"Depreciation" means the gradual and constant decrease in the value of the asset for any reason. "- Carter
The depreciation is intended for
the depreciation charge is obligatory for all businesses:
(1) The recoverable amount of tangible assets over their useful lives is that the (19659002) (2)
(3) to include depreciation in the cost of production to determine the correct production costs;
(4) to establish a good profit for the year;
(5) you can find the correct financial situation through the balance sheet
Reasons for depreciation
Depreciation can be of two types: –
(1) Internal depreciation is known as internal depreciation.
(1.1) Behavior and Termination – The Means of Decreasing the Continuous Abdominal because of the knowledge, building, plant,
machines, etc. This decline depends on the amount of use of a device. If a factory performs a double shift instead of one-off relocation, the depreciation of the factory and the machines will double. Obviously, this loss is inevitable. The device can be maintained under suitable working conditions
through fixes, but this is not possible permanently: at the same time, the device becomes unavailable when it is no longer suitable. [1.2.1.] Depletion-Some assets decline is the value that is proportional to the quantity of production, eg mines, quarry, etc. Coal mines etc. the entire insert gradually decreases, and after a while it is completely depleted. Then its value will be zero.
(2) External depreciation is external for some external reasons
Certain tools can work in order, become obsolete. For example, the old machine becomes obsolete with the invention of a more economical and sophisticated machine whose production capacity is generally higher and the production cost is lower. To survive on a competitive market, the manufacturer must install a new machine in its old place
(2.2) Over time
Reduction in the value of some assets due to the sheer duration, even if they are not used eg patent rights, .
Assets can be destroyed for abnormal reasons, such as fire, earthquake, flood, etc. In this case, the destroyed asset can be described as a loss and has been repurchased
The need for depreciation
The need for depreciation is due to the following reasons:
(1) Depreciation is a loss. So, unless we consider all other costs and losses, the real gain / loss can not be established. In other words, depreciation should be taken into account in order to determine the true profit / loss of the business.
(2) Establishing real cost of production – Goods are manufactured using plants and machines that result in depreciation of production. This depreciation shall be regarded as part of the cost of production of the goods. Otherwise, the cost of production would be lower than the real cost. The selling price is usually determined on the basis of the production cost. Thus, if the depreciation does not reflect production costs, the sales price is also set at a low level, which results in a loss of business activity.
(3) Real asset valuation – The gradual decrease in the value of assets is a depreciation. If the depreciation is not taken into account, the value of the asset must be higher than the actual value in the books and therefore the financial position of the business is not reflected in the balance sheet.
(4) Replacement of some devices – After a while, a device is completely depleted for use. Then you have to buy a new fortune that requires a lot of money. If the total profits are deducted annually from the business without taking into account the depreciation loss, the required amount is not available. buying new devices. In such a case, the necessary money will be borrowed by introducing new capital or by selling other assets. This is contrary to trade policy
(5) The preservation of "Intact-Capital" in the purchase of an invested asset is gradually decreasing
depreciation. If the depreciation loss is not taken into account when determining the year-end gain / loss, the gain will be higher. If surplus profits are withdrawn, working capital will gradually decline, the business will be weak and generate profits
capacity also decreases.
(6) Legal restriction – Sec. Under section 195 (195) of the Companies Act, dividends can not be recognized without depreciation of tangible assets. Thus, the "depreciation of public limited companies" is compulsory