AmericanAccounting Association describesdepreciation as, ” Any declinein the service potential of plant and other long term assets should berecognized in the accounts in the periods in which such decline occurs. Theservice potential of assets may decline because of gradual or abrupt physicaldeterioration, consumption of service potential through use even though nophysical change is apparent, because of obsolescence or a change in consumerdemand. So this definition takes only valuation of assets.
“Instituteof Chartered Accountants in Austriasays, ” Depreciation represents that part of the cost of a fixed asset toits owner which is not recoverable when asset is finally put out of use by him.Provision against this loss of capital is an integral cost of conducting thebusiness during the effective commercial life of the asset and is not dependentupon the amount of profit earned.”IndianAccounting Standard – 6 (AS-6)which was revised in August 1994 and was mandatory in respect of accounts forperiods commencing on or after 1.4.1995 defines,” Depreciation is ameasure of wearing out, consumption or other loss of value of a depreciableasset arising from use, effluxion of time or obsolescence through technologyand market changes. Depreciation is allocated so as to charge a fair proportionof the depreciable amount in each accounting period during the expected usefullife of the asset.
Depreciation includes amortization of assets whose usefullife is predetermined.”AS-6 also explainsthe word depreciable assets as assets which:i) areexpected to be used during more than one accounting period; and ii) havea limited useful life; and iii) areheld by an enterprise for use in production or supply of goods and services,For rentals to others, or for administrative purposes and iv) notfor the purpose of sale in the ordinary course of business.According to FRS-15, The Accounting Standard of United Kingdom and Republic ofIreland, ” The fundamentalobjective of depreciation is to reflect in operating profit the cost of use ofthe tangible fixed assets (i.e. the amount of economic benefit consumed by theentity) in the period. Therefore, the depreciable amount (i.
e. cost or revaluedamount, less residual value) of a tangible fixed asset should be recognized inthe profit and loss account on a systematic basis that reflects as fairly aspossible the pattern in which the asset’s economic benefits are consumed byentity, over its useful economic life.” (Summary paragraph FRS-15). Further following are the words of Australian Accounting Standard (AASB-1021)on Depreciation, ” The depreciable amountof a depreciable asset must be allocated on a systematic basis over its usefullife. The depreciation method applied to an asset must reflect the pattern inwhich the asset’s future economic benefits are consumed or lost by the entity.The allocation of the depreciable amount must be recognized as an expense,except to the extent that the amount allocated is included in the carryingamount of another asset.” (paragraph 5.
1 AASB-1021 Australia) UnitedStates Supreme Court,in Lindheimer vs. Illnois Bell Telephone Company case, defines depreciation, ” Broadly speaking, depreciation is theloss, not restored by current maintenance, which is due to all factors causingthe ultimate retirement of property. These factors embrace wear and tear,decay, inadequacy and obsolescence. Annual depreciation is the loss that takesplace in a year.” Whereas Statement of Standard Accounting Practice (SSAP-12) says, “Depreciation is a measure of the wearing out, Consumption or other permanentloss of value of fixed assets whether arising from Use, Efflux of time or Obsolescencethrough Technological or Market changes. Depreciation should be allocated so asto charge a fair proportion of cost or valuation, to each accounting periodexpected to benefit from the use of an asset.
“In the words of Anthony and Reece, ” With theexception of land, most items of plant and equipment have a limited usefullife; that is, they will provide service to the entity over a limited number offuture accounting periods. A fraction of the cost of the asset is thereforeproperly chargeable as an expense in each of the accounting periods in whichthe asset provides service to the entity, the accounting process for thisgradual conversion of plant and equipment capitalized cost into expense iscalled depreciation. Depreciationexpense does not represent the shrinkage in the real value during theaccounting period, physically themachine may be useful and as valuable at the end of the period as it was at thebeginning. Neither does the net book value represent the market value of theassets on hand. Depreciation expense is a write off of a portion of the cost ofasset, and it follows that the net book value of fixed assets reported on thebalance sheet represents only that portion of the original cost of fixed assetwhich has not yet been charged to expense.”