• Depreciation is a decrease in value of a property over a period of time. Events that can cause a property to depreciate include wear and tear, age, deterioration, and normal obsolescence.

    • Depreciation plays a vital role in deciding the taxable profits from business and profession.

    • Since the useful life (typically few years) of the asset is longer than the accounting period (normally one year), a periodic charge is made for depreciation to systematically apportion the asset cost over its useful life.

    • Depreciation is a non-cash expense that is used to write down the value of an asset over its useful life.

    • The intent of depreciation is to allow a business to recover the cost of an asset over a period of time.

    • Amortization or depreciation are often used interchangeably.

    • The type of property to be depreciated may be tangible or intangible. A tangible property is one that one can touch or see, whereas an intangible property is one that has value but cannot be touched or seen, e.g., copyrights, patents, trademarks, franchises, trade names, and software.

    • Only items that lose useful value over time can be depreciated. Land can’t be depreciated because it can always be used for a purpose. Land value appreciates with time.

  • Terminologies

    • Depreciation reserve is the accumulated depreciation at a specific time.

    • Book value or unamortized cost: The difference between the original cost of a property, and the accumulated depreciation is defined as the book value.

    • Salvage value is the net amount of money obtained from the sale of a used property over and above any charges involved in the removal and sale of the property. The term ‘salvage’ implies that the asset can give some other type of service, after its useful life.

    • Scrap value implies that the asset has no further useful life and is sold for the value of scrap material in it.