Question

Write short notes on treatment of depreciation.

Answer 1

During a year, the value of fixed assets (such as machines, buildings, equipments, etc.) declines due to wear and tear and obsolescence. This decline in the value of fixed assets is known as consumption of fixed capital or depreciation. This decline in value is not made good by current repair or maintenance. By subtracting depreciation from gross fixed capital formation, net capital formation is obtained.

There are two following important forms of consumption of fixed capital:

(i) Wear and tear of fixed capital:

This signifies general wear and tear of machinery in the production process during a year which cannot be made up by current repair or maintenance.

(ii) Obsolescence:

Loss in value of fixed asset either due to change in demand for goods and services it produces or due to change in the technique of production (technology) is known as obsolescence. Due to research and development there is improvement in the technology in every productive activity.

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Answer 2

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