Financial Accounting

11 CHAPTER

Depreciation, Provisions and Reserves

MEANING OF DEPRECIATION

On the basis of Fundamental Accounting Assumption of Going Concern, assets are classified as Fixed Assets and Current Assets. Fixed assets are used in the business to drive benefits for more than one accounting period. Periodic profit is measured by charging cost against periodic revenue. Since fixed assets are used to generate periodic revenue, an appropriate proportion of the cost of fixed assets, which is believed to be used or expired for generation of periodic revenue, needs to be charged as cost. Such an appropriate proportion of the cost of fixed assets is termed as Depreciation.

Generally, the term ‘depreciation’ is used to denote decrease in value but in accounting, ...