Characteristics of Depreciation

The Characteristics of Depreciation are :
1. It is a charge against profit.
2. It indicates diminution in service potential.
3. It is an estimated loss of the value of an asset. It is not an actual loss.
4. It depends upon different assumptions, like effective life and residual value of an asset.
5. It is a process of allocation and not of valuation.
6. It arises mainly from an internal cause like wear and tear or depletion of an asset. But
it is treated as any expense charged against profit like rent, salary, etc., which arise due
to an external transaction.
7. Depreciation on any particular asset is restricted to the working life of the asset.
8. It is charged on tangible fixed assets. It is not charged on any current asset. For allocating
the costs of intangible fixed assets like goodwill. etc, a certain amount of their
total costs may be charged against periodic revenues. This is known as amortization.
Depreciation includes amortization of intangible assets whose effective lives are preestimated.
Intangible assets render benefits but they do not have any physical existence,
their ‘economic- values’ are perceived to exist. ‘Amortization’ or ‘Writing Off such
assets is made to account for the deterioration of their economic values.

Under depreciation, ‘Depletion’ and ‘obsolescence’ are also covered. ‘Depletion’ means gradual
exhaustion of physical resources due to extraction etc, as found in mines, quarries etc.
‘Obsolescence’ means a major deterioration in the utility of an asset due to (i) innovation of
improved substitutes or techniques;’ (ii) drastic fall in the demand of a product arising
through change in market conditions, tastes or fashions; and (iii) usefulness lost and inability
arising to cope with increased scale of operation.