American Accounting Association defines the term depreciation: “Any decrease in the serviceability of long-term assets and plant should be recorded in the account in the period that the decline occurs.” Service potential can be affected by physical degradation, obsolescence, or changes in consumer demand. This definition only takes into account the value of assets.”
According to the Institute of Chartered Accountants in Austria, “Depreciation represents the part of a fixed assets cost that an owner cannot recover when he finally stops using it.” Provision for this loss of capital during the commercial life of an asset is a cost that is inherent to the operation of a business and does not depend on the profit made.
Indian Accounting Standard – 6 – AS-6 – was revised by the Indian Accounting Standards Board in August 1994. It was mandatory to be used for accounting periods beginning after 1.4.1995. Depreciation amounts are charged so that they represent a reasonable proportion of depreciable assets in each period of accounting during the expected useful lifetime of an asset. Depreciation can include amortization on assets whose life expectancy is fixed.
AS-6 explains depreciable asset as:
Are expected be used over more than one financial period
Limit their useful life.
Holdings of an enterprise are used for production, supply, rental, or administrative purposes.
Not in order to sell the goods or services in the course of normal business.
According to FRS-15 The Accounting Standard of United Kingdom of Ireland and Republic of Ireland: “The fundamental purpose of depreciation (i.e. The entity’s economic benefit for the period. Depreciable amounts (i.e. The depreciable amount (i.e.
Australian Accounting Standard (1021) on Depreciation says: “The depreciable amounts of depreciable assets must be allocated on an ongoing basis throughout their useful lives.” The depreciation of an asset must be based on the manner in which future economic gains are absorbed or lost. The depreciable amount must also be recorded as an expense unless it is part of another asset’s carrying value. (paragraph 5.1 of AASB-1021 Australia).
In Lindheimer’s vs. Illnois Bell Telephone Company, the United States Supreme Court defined depreciation. Wear and tear, decay and inadequacy are all factors that contribute to depreciation. Depreciation occurs in one year.
Statement of Standard Accounting Practices (SSAP-12), states: “Depreciation represents the permanent loss of value of fixed asset due to wear and tear, consumption, or obsolescence caused by technological or market changes.” Depreciation must be charged to each accounting year that is expected to benefit by the asset.
Anthony and Reece stated that most plant and furniture have a short useful life. In other words, these items will be used by the entity only for a few accounting periods in the future. Depreciation refers to the accounting process that gradually converts the capitalized cost of equipment and plant into an expense.
Depreciation is not a measure of shrinkage. The machine might be as valuable as before the period began, and still useful. Net book value also does not reflect the actual market value. The net book value is only the portion of cost that has not been deducted as an expense.