Features of Depreciation

Depreciation: What It Really Is

Depreciation is not a single, simple idea — it is a bundle of related characteristics that together define how accountants treat the wearing out of long-lived assets. The textbook identifies five essential features, and each one matters for a different reason: for how you calculate profit, for how you record the entry, and for how you think about the asset's value over time.

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1. Decline in Book Value of Fixed Assets

Depreciation reduces the book value (the amount at which an asset appears in the books) of a fixed asset. This is not a fall in market price — it is a systematic reduction in the recorded cost. The asset was bought for a certain amount; depreciation gradually writes that cost off over the asset's useful life.

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2. Loss of Value Due to Effluxion of Time, Usage, or Obsolescence

Value can be lost for three distinct reasons, and depreciation captures all of them:

• Effluxion of time — even if an asset is never used, its value falls simply because time passes. A leasehold property, for example, loses value each year as the lease term shortens.
• Usage — the more an asset is used, the more it wears out. A delivery van that runs 50,000 km a year depreciates faster than one that runs 10,000 km.
• Obsolescence — an asset becomes outdated even if it is still in good physical condition. The textbook gives a clear example: a firm buys a machine for ₹1,00,000 on April 1, 2017. Later that same year, a new version of the machine arrives. The old machine is now obsolete. The resulting loss in value is caused by obsolescence, not by wear and tear.

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3. A Continuing Process

Depreciation is not a one-time adjustment. It is charged every accounting period over the asset's useful life. You cannot skip a year and then catch up — the charge is recurring and systematic. This is what makes it a "continuing process."

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4. An Expired Cost — Deducted Before Calculating Taxable Profit

Depreciation represents the portion of the asset's cost that has been "used up" or has expired during the period. Because it is an expired cost, it must be deducted from revenue before arriving at profit before tax.

The textbook illustrates this with a simple calculation:

The logic is straightforward: the asset's cost was incurred to earn revenue. That cost must be matched against the revenue it helped generate. Depreciation is the mechanism that achieves this matching.

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5. A Non-Cash Expense

This is perhaps the most frequently misunderstood feature. Depreciation is an expense, but it involves no cash outflow in the period it is charged. The cash was already spent when the asset was bought. Depreciation is simply the process of writing off that past capital expenditure over the asset's useful life.

The journal entry for depreciation is:

At the end of the period, the Depreciation account is closed by transferring it to the Profit and Loss account:

Notice that no cash account is ever touched. The asset's book value is reduced, and an expense is recognised — but no money leaves the business at this stage.

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Summary of Features at a Glance