Subject: Industrial Engineering And Management

Topic: Cost Accounting and Financial Management

Difficulty: Low

Depreciation:

The term depreciation refers to fall in the value or utility of fixed assets which are used in operations over the definite period of years. In other words, depreciation is the process of spreading the cost of fixed assets over the number of years during which benefit of the asset is received. The fall in value or utility of fixed assets due to so many causes like wear and tear, decay, effluxion of time or obsolescence, replacement, breakdown, fall in market value etc.

Depreciation is the measure of the wearing out, consumption or other loss of value of a depreciable asset arising from use, effluxion of time or obsolescence through technology and market changes.

Depreciation is treated as a revenue loss which is recorded when expired utility fixed assets such as plant and machinery, building and equipment etc.

Methods of Calculating Depreciation:

The following are the various methods applied for calculating depreciation cost:

(1) Straight Line Method

(2) Written Down Value Method

(3) Annuity Method

(4) Sinking Fund Method

(5) Revaluation or Appraisal Method

(6) Insurance Policy Method

(7) Depletion Method

(8) Sum of the Digits Method

(9) Machine Hour Rate Method