DEPRECIATION - Introduction

A business or concern holds fixed assets for regular use and not for re-sale. The capability
of a fixed asset to render service cannot be unlimited. Except land, all other fixed assets have
a limited useful life. The benefit of a fixed asset is received throughout its useful life. So its
cost is the price paid for the ‘Series of Services’ to be received or enjoyed from it over a
number of years and it should be spread over such years,
Depreciation is the allocation of the cost of a fixed asset over the years of its working life.
Indian Accounting Standard (AS 6) states that “Depreciation is allocated so as to charge a
fair proportion of the depreciable amount in each accounting period during the expected
useful life of the asset.”
Long-term fixed assets are used in the process of earning revenue. Due to regular use such
assets gradually lose their service potentials. Such losses are considered as expired costs
which have to be matched against the periodic revenues. The latin word ‘depretium’ literally
means ‘reduction of value’. So depreciation means the reduction in value of assets which has
to be considered for determining revenue. R. S. Anthony and J. S. Reece observed that “the
cost of an asset that has a long but nevertheless limited life is systematically reduced over
that life by the process called depreciation.”
The cost of a fixed asset is a capital expenditure. Depreciation is allocated for every accounting
period as a cost or an expense which is matched against the revenue of such period.
Although it is a measure of the decrease in the value of assets put to use, it is actually a
process of allocation. For this reason, International Accounting Standard (IAS)-4 provides
that “Depreciation is the allocation of the depreciable amount of an asset over its estimated
useful life.” In Accounting Research Bulletin No. 22, AICPA observed that “Depreciation for
the year is the portion of the total charge under such a system that is allocated to the year.
Although the allocation may properly take into account occurences during the year, it is not
intended to be the measurement of the effect of all such occurrences.”