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whatis the meaning of Depreciation? and why it will charge?
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Answer Posted / kuldip jagdish vaswani
Depreciation is an Measure of Wearing Out, Consumption and Other Loss in the Value of the Fixed Asset arising from Use Or Passage of the Time. Depreciation is an Nothing but Distribution of Total Depreciable Value of Fixed Assets over useful life of Fixed Assets. ( AS 6 - Depreciation of Indian Accounting Standards)
Depreciable Value of Fixed Assets = Total Cost of Fixed Assets Less Scrap Value
Depreciation is Been Charged for the Following Above Reasons
a) Correct Income Measurement : Depreciation should be charged fro proper estimation of Periodic Profit or Loss
b) True Financial Position : Value of the Fixed Assets should be Adjusted for Depreciation Charged in order to Depict Actual Financial Position
c) In Order to Ascertain Correct Cost of the Production
d) It Provides funds for replacement of fixed asset at the end of its useful life
and Last and Most important
As we are Following Accrual System of Accounting so Matching of Cost and Revenue comes to the picture.
So Cost of Assets matches to the Sales in the year of the Sale.
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