Depreciation on Fixed Assets

Depreciation on Fixed Assets

Meaning: the portion of a fixed asset's cost that is consumed, used up, or allocated as an expense during the current accounting year, reflecting the wear and tear (or the passage of useful life) the asset undergoes while helping the business earn revenue. This is the same matching principle again — the asset HELPED earn this year's revenue, so a fair share of its cost must be charged against this year's profit.

Double effect:

1. Debited to the Profit and Loss Account as an expense ("To Depreciation").
2. Deducted from the asset's value on the assets side of the Balance Sheet (the asset is shown at its reduced, or "written down," value).

Typical calculation: Depreciation = Asset's Cost (or Written Down Value) × Rate per annum. If a Trial Balance shows Furniture at ₹60,000 and depreciation is to be charged at 10% p.a., the depreciation for the year is ₹6,000, and Furniture is shown in the Balance Sheet at ₹60,000 − ₹6,000 = ₹54,000.