Depreciation

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Depreciation is the portion of the cost of fixed assets charged each year as expense. It means the gradual and permanent decrease in the value of an asset due to defluxion of time, wear and tear, obso…

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A fixed asset gives service to the business for many years. It is neither goods nor an expense of one year. So its cost is spread over its useful life instead of being charged in one year.

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Fixed assets are assets such as buildings, furniture and fixtures, machinery and plant, and motor vehicles. They provide benefits to the business for more than one year, so they are also called long t…

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Current assets include cash, debtors or customers balances, and stock of materials and goods. Fixed assets are long term assets that give benefit for more than one year. Current assets are not meant f…

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Depreciation arises due to normal wear and tear and obsolescence. Wear and tear happens because of use and passage of time. Obsolescence happens when better equipment, fashion, taste, or market condit…

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Obsolescence is loss in the value of fixed assets due to development of improved equipment or change in fashion, style, taste, or market conditions. It is also charged as depreciation.

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Steam engines became obsolete because improved equipment such as diesel and electric locomotives came into use. Better technology reduced the usefulness and value of the older machines.

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One objective is to show the true financial position of the business. Another objective is to retain funds in the business for replacement of the asset.