DEPRECIATION, PROVISIONS AND RESERVES

Depreciation:
Depreciation may be defined as the permanent and continuous diminution in the quality, quantity or value of an asset.

Internal depreciation:

Depreciation which occurs for certain inherent normal causes, is known as internal depreciation. Such as wear and tear and depletion.

External depreciation:

Depreciation caused by some external reason is called external depreciation. Such as obsolescence, efflux of time and accident.

Wear and tear:

The change in the shape of an asset due to use in business is known as wear and tear.

Depletion:

The decrease in the value of proportionate to the quantum of production e.g. mines, quarries, oil wells, forests etc.
                                                                OR
Decrease in the value of wasting assets is called depletion.

Obsolescence:

The decrease in the value of an asset due to new invention, change in habit and taste of people, improvements is known as obsolescence.

Fluctuation:

The decrease or increase in the market value of asset not due to use in business is known as fluctuation.

Cost price of an asset:

It include all expenses involved in carrying and installing the asset to the site.

Working life of an asset:

The period during which an asset will help earning income of business.

Scrap value of an asset:

The price at which an asset will be sold at the end of its working life. It is also known residual value or break up value.

Market price of an asset:

The price at which an asset can be sold in the market is called mark price.

Fixed installment method of depreciation:

Under this method depreciation of an asset will be equal in each accounting year.

Reducing balance method:

Under this method depreciation is calculated on the book value of an asset.

Amortization:

The decrease in the value of intangible asset such as patents, copy right, goodwill etc.

Fixed assets:

Assets which have long life and which are bought for use for a long period of time are called fixed assetss. These are not bought for selling purpose e.g. land, building, machinery, furniture etc.

Tangible assets:

Assets which have physical existence and which can be seen, touched and felt are called tangible assets e.g. building, machinery, furniture etc.

Intangible assets:

Assets which have no physical existence and which cannot be seen, touched but can be felt are called intangible assets e.g. goodwill, patent right, trade mark etc.

Wasting assets:

Assets whose value gradually reduces on account of use and finally exhausts completely are called wasting assets, e.g. mine, forests etc.