Depreciation is defined as “the permanent reduction in the value of an asset as a result of wear and tear in use or the passage of time and depreciation rate as per income tax act is 40%
“The primary definition of depreciation is the loss of value due to wear and tear or other forms of material deterioration. The operation of modifying the book values of assets is the secondary sense of depreciation. As machines or other assets age, the accountant’s approach is to diminish their worth in the books of accounts, commonly referred to as depreciation.”
“Depreciation is an expense or loss that must be factored into the cost of employing machinery, motor vehicles, equipment, and other fixed assets in the production process.”
Depreciation is a ratable reduction in a fixed asset’s carrying value. Depreciation is meant to roughly reflect the actual consumption of the underlying asset. and at the last of its useful life, the carrying amount of the item has been reduced to its salvage value. But why do we require depreciation in the first place? The factors that contribute to depreciation are listed below along with form 280.
Parts wear out and need to be done maintenance over time. Therefore any asset will gradually degrade over time. The item will eventually be unable to be repaired and will have to be disposed of away. This is the most common cause for manufacturing equipment, with a manufacturer’s specified life duration based on the number of units produced. Buildings, for example, can be fixed and upgraded over a long period.
Some assets have a very short useful life. Inventory, rather than physical assets, is more affected by this circumstance.
A fixed asset could be a license to use something (like software or a database) for a specific amount of time. If this is the case, its life span ends when the usage rights expire. Hence depreciation must be completed before the usage time ends.
Use of Natural Resources
Suppose an asset is made up of natural resources, such as an oil or gas reservoir. In that case, depreciation occurs as the resource is depleted (in this case, it is called depletion rather than depreciation). The pace of depletion may fluctuate if a business subsequently modifies its estimate of reserves left.
More efficient equipment will render some equipment outdated, reducing the usability of the previous equipment.
The destruction or damage of equipment is a variation of the depreciation idea. If this occurs, the equipment will need to be written down or written off to reflect its lower worth and perhaps shorter usable life. Another variety is asset impairment, where the carrying cost of an asset is higher than its market value. If the asset is impaired, the difference is charged to expense, lowering the asset’s carrying value.
When an asset is damaged or impaired, it can be considered a cause of depreciation since it increases the amount of depreciation that needs to be recorded.