The life of an asset to a company depends largely on the purpose of acquisition, and secondly on the nature. An item is sold for immediate consumption or purchase of short duration and that the real estate is held for prolonged use, is of long duration, although both have an income. While the first plants to run after a year of acquisition, the assets, which lasts longer. Therefore, spending almost all of an asset is an expense of short and is in current yearRevenue.
But the situation is different, worn with a long-term activity will be written off, or over a long period of time. Consequently, the cost of assets over several years and each year are a fraction of this distribution ends. Simply put, the village, called expired cost or depreciation, in current revenue and pay the rest, said the UN has cost us run is performed on the coming times.
"Depreciation may be defined as the impairment of an assetdue to the use and / or the date of expiry. "Terminology of the Institute of Cost and Management Accountants, England
"Depreciation is the permanent and continuous decline in the quality, quantity or value of the property. Pickles
"Depreciation is a measure of the destruction of the effective life of an asset shall be determined for a cause in a certain period." Spicer and Pegler
"Depreciation is the gradual and permanent decline in the value of an asset for allQuestion. "Carter
Objects include a provision for impairment
In order to achieve the following objectives, the depreciation accounting is a must for every business
(1) The recovery of expenditure on capital goods for the estimated useful life have emerged to keep intact the capital of the owner;
(2) The amount of the replacement value for the transfer of the goods;
(3) includes the amortization of production costs to determine the exact cost of production;
(4)Learn to fix a non-profit for the year;
(5) to see the situation through the proper financial balance.
Causes of depreciation
Depreciation can be two types: --
(1) Interior depreciation occurs in some cases with normal is known that the internal damping. The causes of internal damping are:
(1.1) normal wear and tear of assets by continuous use, such as buildings, equipment,
Machinery, etc. This drop isQuantum for the use of the property. If a plant operates two shifts, instead of being doubled for a single layer, the depreciation of machinery and equipment. It is obvious that this loss is inevitable. An activity can be maintained in good working conditions
with repairs yet, but it can be done continuously, if assets are not suitable for repair when it is most appropriate.
(1.2) Depletion Some activities by the appreciation in proportion to the amount ofProduction, mining, etc. career with the extraction of coal, mine, etc., the total number of deposit is progressively reduced and after some time you will be fully utilized. Then the value will be zero.
Due (2) Other affected by some external reasons and external calls
Depreciation.
External causes of depreciation are:
(2.1) overhauled
Some activities, but in good working conditions, could become obsolete. For example, the old one obsoleteThe invention of the machine more expensive and demanding, whose production capacity is generally higher and the cost of production lower. To survive in the competition, the manufacturer must install new machine replaces the old one.
(2.2) over time
Some decline in property value due to the simple passage of time, even if they are used, for example, to lease the property, patents, copyrights, etc.
(2.3) injuries
Activities can beby unusual reasons, such as fires, earthquakes destroyed, floods, etc. can be removed from the destructive activity of the loss in such cases and bought.
Requirement Depreciation
The need for a provision for impairment is apparent from the following reasons:
(1) determine the gain or loss of real depreciation is a loss. So unless it's like all other costs and losses of the actual profit treats / loss can be detected. In other words, the depreciationbe considered in determining actual profit / loss of business.
(2) to determine the actual cost of producing goods are produced with machines and equipment with the devaluation of the manufacturing process. The impairment must, as part of the cost of production of goods. Otherwise, the cost of production would be shown, unless the actual cost. The price is usually determined on the basis of production costs. So if the cost of production is shownIgnoring less depreciation, the purchase price will be set at a low level, causing the loss of the company;
(3) the valuation of assets, reduces the value of the assets to the gradual devaluation. If depreciation is not taken into account, the value of the assets on the books are displayed in an amount greater than its actual value, and then the true financial position of the company will not be disclosed in the balance sheet.
(4) the replacement property after a certain time, a goodis completely, because the appeal are exhausted. New goods are purchased that require a large sum of money. If the entire amount of the profit to be removed from the economy each year, regardless of the loss of depreciation, the amount needed may not be available. the acquisition of new equipment. Be exercised in such cases the money due to the introduction of new capital or obtain loans through the sale of certain other securities. This is in contrast to 0sound & Commercial.
(5) Maintain CapitalIntact Capital has invested in the purchase of a system is gradually being reduced
Account for depreciation. If the loss from depreciation not included in the calculation of earnings used / losses at year-end, the result will be shown again. If the extra profit is removed, the working capital, and after, the company is too weak and reduced its profit without profit
Capacity will decrease.
(6) Legal restrictions under Art. 205 of the Companies Act 1956, no dividend may be declaredDepreciation of capital goods. As required in "cases of renal Corporations fee.
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