Depreciation according to Webster’s New World Dictionary, means “a decrease in value of property through wear, deterioration or obsolescence; the allowance made for this in book-keeping, accounting etc.” William Pickles in Accountancy says ‘depreciation is the inherent decline in the value of an asset from any cause whatsoever.
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• Spicer and Pegler in their celebrated book on Book-Keeping and Accounts are of the opinion that “depreciation is the measure of the effective life of an asset owing to use or obsolescence during any given period. The object of providing for depreciation is to spread the expenditure incurred on the asset over its effective life time, and the amount written off during an accounting period is intended to represent the proportion of such expenditure which has expired during the period.”
• The term ‘depreciation’ has not been defined anywhere in the Act and, therefore, the usual commercial terminology is to be relied upon. Since it is a recurring phenomenon it should be deducted from the profits every year in order to arrive at a correct figure thereof.
Factors responsible for depreciation :
The main factors responsible for the retirement of a capital asset and, hence, responsible for its depreciation are:
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(a) ordinary wear and tear,
(b) unusual damage,
(c) inadequacy,
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(d) obsolescence.
Thus not only factors relating to physical deterioration are included, but also those referring to the suitability of the asset as an economically productive unit after a period of time. The depreciation allowance can be claimed if the asset in question can be shown to be capable of diminishing in value on account of any factor known lo the prevailing accounting or commercial practice.