Accountancy · Ch 10 — Depreciation Accounting
Meaning, Need and Causes of Depreciation
Meaning, Need and Causes of Depreciation
Every fixed asset used in a business — machinery, furniture, a vehicle, a building — gradually loses value over time as it is used, ages, or becomes outdated, well before it is finally disposed of. Depreciation is the accounting term for the systematic allocation of a fixed asset's cost (less its estimated residual/scrap value) over its useful life, so that each accounting period bears its fair share of the cost of using that asset to earn revenue in that period — exactly the Matching Principle applied to a long-lived asset.
Depreciation is NOT the same as an asset's fall in market value — its purpose is to spread COST over time for accounting purposes, not to track resale price. The common causes of depreciation include:
| Cause | Explanation |
|---|---|
| Wear and tear | Physical deterioration from regular use |
| Efflux of time | Some assets (like a lease) simply expire after a fixed period, regardless of use |
| Obsolescence | A newer, better technology or design makes the existing asset outdated, even if it still physically works |
| Depletion | Natural resources (mines, quarries, oil wells) are physically exhausted through extraction |
Without charging depreciation, a business would overstate both its profit (by not recognising the cost of using up its fixed assets) and the value of its assets in the Balance Sheet (by continuing to show them at their full original cost year after year) — depreciation is what keeps both figures honest.
Tamil Nadu's HSC Commerce Accountancy syllabus tests depreciation using the same Straight Line and Written Down Value methods taught in every Indian board's commerce stream, including CBSE/NCERT.
The systematic allocation of a fixed asset's cost (less its estimated scrap value) over its useful life, so each accounting period bears a fair share of the cost of using that asset.
A fall in an asset's usefulness because a newer technology, design, or method has made it outdated — independent of the asset's actual physical condition.