Depreciation

Depreciation is the gradual reduction in the value of a fixed asset over its useful life. This decline happens because of two main reasons: wear and tear from using the asset, and the simple passage of time (obsolescence). In accounting, depreciation is treated as a genuine business expense. The logic is that every asset used to earn revenue loses some of its value in the process. By recording depreciation, you are effectively writing off a portion of the asset's cost against the profits of the period in which it was used.

The journal entry to record depreciation is straightforward. You debit the Depreciation account (an expense) and credit the specific asset account. This reduces the asset's book value directly.

In the Balance Sheet, the asset is no longer shown at its original cost. Instead, it is shown at its cost minus the accumulated depreciation provided up to that date. This net figure is called the book value or written down value of the asset.

Worked Example from the Textbook

The textbook uses the example of Ankit's business. His trial balance shows a Furniture account with a balance of ₹15,000. The furniture is subject to depreciation at 10% per annum.

Step 1: Calculate the depreciation amount.

Depreciation = ₹15,000 × 10% = ₹1,500

Step 2: Record the adjustment entry.

Step 3: Show the effect in the Profit and Loss Account.

Depreciation is an expense. It appears on the debit side of the Profit and Loss Account, reducing the net profit. In Ankit's account, you can see "Depreciation-Furniture ₹1,500" listed as an expense.

Step 4: Show the effect in the Balance Sheet.

The Furniture is now shown at its book value. In the Balance Sheet, under Non-Current Assets, it appears as: