Wednesday, January 14, 2009

Depreciation of Fixed Assets

A fixed asset has a limited life. The allocation of its cost cover its useful life is termed either depreciation or depletion or amortization. These are explained as under:

The cost of fixed intangible assets, which has been used, is called amortization.

The exhaustion (physical shrinkage, lessening or waste) of a natural recources is called "Depletion". It is charged on the wasting fixed assets such as oil and mineral deposits etc.

The cost of permanent fixed tangible asset, which has been used, is called "depreciation". It is charged on the permanent fixed assets such as machinery and equipment except land.

Depreciation expense must be recorded because it is one of the costs which are incurred in the production of periodic income. If depreciation was not recognized upon the books, the net income of the business would be overstated and depreciable asset would appear in the balance sheet at value greater than their real values.

Assets cost includes all expenses relating to the acquisition of asset and including it in the factory. The salvage value of a depreciable asset is that amount which can be expected to be realized upon retirement of an asset. The life of an asset may be expressed in terms of either an estimated time factor or estimated use factor. The time factor may be a period of month or years. The use factor may be a number of hours of service or number of units of output.

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