Tuesday 31 March 2015

What is the need of depreciation account?

According to the matching principle of accounting, the costs incurred in the accounting year should be matched with the revenue or income earned during the same accounting year. Thus, it is necessary to spread the cost of fixed asset less scrap or realizable value after the useful life of the fixed asset is over and this process of ascertain the same is called depreciation accounting. Thus, depreciation account is needed for mainly two purposes:

To ascertain due profits and to represent the value of the fixed asset at its unexpired cost i.e book value of the asset less depreciation.


What is depreciation? What are the causes of depreciation? Is it a cost? Why?

Depreciation is a permanent, gradual and continuous reduction in the book value of the fixed asset. Except Land all the fixed assets e.g. Car, Machinery, Furniture etc depreciates in value making the asset useless after the end of a certain period.

Following are the causes of Depreciation:
-Wear and Tear due to regular use of the asset
-Deterioration occurs with the passage of time, whether the asset is in use or not
-Damages done to the assets due to an accident like fire, mishandling etc.
-Depletion of Asset
-Obsolescence i.e. due to new technology in use, new inventions, innovations etc.

Yes, depreciation is a cost. It is a historical cost, which is charged against profits of the organisation reducing the profitability. It is a non-cash cost as it is never paid or incurred in cash.

Contra entry example

Contra Entry :- If a transaction requires entries on both the debit and the credit sides simultaneously, it is called 'Contra entry&...