Question

what is depreciation?​

Answer 1

Every business concern attains certain fixed assets, which are ofcourse used in the business for its trading activities.

Working life of all fixed assets (excluding land), decreases as the time pàsses gradually. The value of these assets decrease every year. This reduction is called as 'Depreciation'.

According to R.G Williams, Depreciation is simply defined as a gradual deterioration in the value due to use.

• What is the importance of Depreciation?

1. It is essential to determine the true and exact value of an asset at a particular time period. Even if any asset is out of usage, its value gets reduced with pàssage of time.
2. The asset will be over valued and so it'll be difficult to find out the true value of asset and financial position of concern, if depreciation is not provided.
3. Depreciation is necessary, so that at the end of the asset's life, it can be easily replaced. If provision for depreciation is not made, the business may not have sufficient funds to replace it.

According to Fixed instàllment method of depreciation, Formula is: $\small{\tt{Depreciation = \frac{original \: cost - scrap \: value}{estimated \: life \: of \: asset}}}$

Also, depreciation is charged when the rate of depreciation is given. It is calculated by using this formula: $\small{ \tt{Depreciation = \frac{cost \: of \: asset \times rate \: of \: depreciation}{100}}}$