Definition, Explanation and Characteristics of "Depreciation" or "Accounting Depreciation"

12/08/2008 20:57


Definition, Explanation and Characteristics of "Depreciation" or "Accounting Depreciation":

Learning Objectives:

  1. Define and explain the terms "depreciation" or "accounting depreciation".

The value of assets gradually reduces on account of use. Such reduction in value is known as depreciation. Different authors have given different definitions of depreciation, such as:

"Depreciation may be defined as the permanent continuous diminution in the quality, quantity or value on an asset."  (By Pickles)

"Depreciation is the gradual permanent decrease in the value of an asset from any cause."  (By Carter)

"Depreciation may be defined as a measure of the exhaustion of the effective life of an asset from any cause during a given period." (By Spicer & Pegler)

Depreciation is the diminution in intrinsic value of an asset due to use and/or the lapse of time."  (By Institute of Cost and Management Accountants, England)

"Depreciation is the reduction in the value of a fixed asset occasioned by physical wear and tear, obsolescence or the passage of time."  (Northcott & Forsyth)

"Depreciation is the diminution in the value of assets owing to wear and tear, effluscion of time, obsolescence or similar causes."  (Cropper)

From the above definitions, it follows that an asset gradually declines on account of use and passage of time and this causes permanent reduction in the value and utility of asset. Such reduction in the value or utility of asset is called depreciation. In other words, expired cost or utility of asset is depreciation.

Characteristics of Depreciation:

Depreciation has the following characteristics:

  1. Depreciation is charged in case of fixed assets only. e.g., building, plant and machinery, furniture etc. There is no question of depreciation in case of current assets - such as stock, debtors, bills receivable etc.

  2. Depreciation causes perpetual, gradual and continual fall in the value of assets.

  3. Depreciation occurs till the last day of the estimated working life of the asset.

  4. Depreciation occurs on account of use of asset. In certain cases, however, depreciation may occur even if the assets are not used, e.g., leasehold, property, patent, copyright etc.

  5. Depreciation is a charge against revenue of an accounting period.

  6. Depreciation does not depend on fluctuations in market value of assets (see difference between depreciation and fluctuation page).

  7. The amount of depreciation of an accounting year cannot be determined precisely - it has to be estimated. In certain cases, however, it may be ascertained exactly, e.g., leasehold property, patent right, copyright etc.

  8. Total depreciation of an asset cannot exceed its depreciable value (cost less scrap value).