What do you understand by the term “DEPRECIATION”?

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What do you understand by the term “DEPRECIATION”?

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  • 22 Sep, 2018

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The method by which the cost of any real asset is altered due to its use through its life is known as DEPRECIATION. In accounting terms, depreciation refers to the actual cost reduction of any fixed asset in an ordered manner, until the value becomes trivial. When the economic worth of an asset reduces with time, because of use, wear and tear or undesirability. The amount of decrease in the value is known as DEPRECIATION.

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Depreciation refers to the reduction in the value of any tangible asset with the passage of time. in terms of accounting, depreciation is a method of fluctuating the cost of an asset acquired over a specific time period. At the end of the fiscal year, when the net income of the business is calculated, a small amount is subtracted according to the number of years the asset was used. This amount is the depreciation value. Depreciation can be calculated in the following two ways:

Straight line method

This is the easiest method to calculate depreciation and hence there are a very few chances of getting errors. By using this method, the depletion pattern of the asset can be detected. This method is used in the case when there is no exact method to find out the way in which asset is used during that particular period.

Written down method

This is also known as Diminishing Balance Method. In this method, the depreciation is calculated at a fixed percentage every year. As the amount reduces every year, it is not possible to end till its value becomes zero, but, yes, it has to be worked upon until the value is at its lowest. 

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