Meaning of Depreciation

 

Meaning of Depreciation

Let me introduce a new term called Depreciation. Depreciation is the consumed portion of Expenditure, which appears as an Expense. Expense and Expenditure are different terms in accounting. Let us try to answer this question. Did the business buy the Machinery to use it once or will they be using it more than once? In all likelihood they will be using it more than once. The important question is how many times can they use the Machinery? It is like asking a person who buys a car – How many times you will use this car? If the question comes up then the answer will be it depends on:

  • Who the manufacturer is?
  • Who is driving the car?
  • Who is servicing the car?
  • And how well it is maintained.

This will be applied even to the Machine in any business. So it is very difficult to come with an exact number. However an estimate will be done and every year the tax department will be given the depreciation value of all the Assets. The accountants keep themselves updated with the depreciated values. They will enter that value when preparing the financial statements. That is the reason we pay the accountants, Right!

Now let us assume that the depreciation value of the machine that was used in the business is 10%. Also let us assume the machine was purchased to be used for ten times. We have already used it once. So we can use it for nine more times. In other words we have consumed one-tenth of that machine. The consumed part is called Depreciation and appears as an Expense.