We know that a sole proprietor commences business with capital in the form of various assets and liabilities. The assets can be in form of fixed assets (or long-term assets) and current assets. Both the type of assets are acquired to carry out various business activities. Fixed assets are used for the production of various goods and services whereas, current assets are consumed for the production of various goods and services of a business. Fixed assets are used continuously in daily business operations. Therefore, with the passage of time and their consistent use in the business their value may decrease due to normal wear and tear. This decrease or fall in the value of the fixed assets is termed Depreciation. The Meaning of Depreciation is discussed below
Meaning of Depreciation
Reduction in the value of fixed assets associated with their continuous use in the business is regarded as Depreciation. Depreciation is a permanent decrease in the value of the fixed asset. All the fixed assets, except land, have a specific useful life in the business. Generally, the total cost of an asset is spread over its useful life in the business and this allocation of cost is regarded as Depreciation. Thus, it can be said that depreciation is an allocation of the cost of an asset over its useful life and is not a valuation process of the asset.
It should be noted that generally no depreciation is provided on land. This is because the land is assumed to have an infinite life in the business. According to William Pickles, ‘Depreciation is the permanent and continuing diminution in the quality, quantity or value of an asset’. In the words of J.R. Batliboi, ‘It is a matter of common knowledge that all fixed assets such as plant, machinery, building, furniture, etc. gradually diminish in value as they get older and become worn out by constant use in the business’.
According to the Matching Concept, Depreciation is considered as an expense only to the extent of the decrease in the value of the asset during an accounting period. In other words, it refers to the value of fixed assets consumed in the production process during an accounting period.
As depreciation is a reduction or loss in the value of fixed assets, therefore, it is charged from the revenues earned by a business. It is charged by recording it on the Debit side of the Profit and Loss Account.
accounting information is often defined as data and facts produced or revealed by the financial statements of a business. This information is usually available within the sort of financial statements, financial reports, etc.
Petty Cash Book is a book that records a large number of small payments such as conveyance, cartage, postage, telegram, and other expenses.