Meaning and Nature of Depreciation

Every business that owns fixed assets — machinery, furniture, buildings, vehicles — knows that these assets do not last forever. They are used year after year to earn revenue, and in the process their value keeps falling. Accounting for this fall in value correctly is the subject of this chapter, and it is one of the most practically important topics of the Maharashtra HSC (MSBSHSE) Std XI Book-Keeping and Accountancy syllabus — a topic every business, big or small, must deal with in real life.

What is depreciation? Depreciation is the gradual and (normally) permanent decrease in the value of a fixed (long-term) asset, caused mainly by its use in the business and by the passage of time. It is NOT a cash expense — no money actually leaves the business when depreciation is recorded — but it is a genuine loss in the value of an asset that must be recognised in the books, exactly like any other business expense, if the firm's profit is to be measured correctly.

Key features of depreciation:

• It is a fall in the book value of a fixed asset, not of a current asset (stock, debtors, cash) — those are dealt with differently.
• It is gradual and continuous — it happens bit by bit, year after year, not suddenly.
• It is (normally) permanent — once value is lost through wear and tear, it cannot be recovered simply by repairing the asset.
• It is an estimated figure, not an exact one — nobody can measure to the rupee how much a machine's value has fallen in a year; accountants estimate it using a systematic method (the two most common of which — the Straight Line Method and the Written Down Value Method — are studied in this chapter).
• It applies only to assets with a limited useful life — land, which does not wear out, is not depreciated (though a building constructed on it is).

Throughout this chapter, remember that depreciation is charged so that the true profit of the business, and the true value of its assets, are shown in the final accounts — this idea runs through everything that follows, and it is exactly why this chapter matters for any student working through the Maharashtra State Board's Class 11 Accountancy course.