* causes of depreciation:
Depreciation is a ratable reduction in the carrying amount of a fixed asset. Depreciation is intended to roughly reflect the actual consumption of an underlying asset, so that the carrying amount of the asset has been greatly reduced by the time its useful life is over.
1. Wear And Tear
wear and tear refer to a decline in the efficiency of asset due to its constant use. When an asset losses its efficiency, its value goes down and depreciation arises. This is true in case of tangible assets like plant and machinery, building, furniture, tools and equipment used in the factory.
2. Effusion Of Time
The value of asset may decrease due to the passage of time even if it is not in use. There are some intangible fixed assets like copyright, patent right, and lease hold premises which decrease its value as time elapse.
An asset may loss its value because of exhaustion too. This is the case with wasting assets such as mines, quarries, oil-wells and forest-stand. On account of continuous extraction, a stage will come where mines and oil-wells get completely exhausted.
Changes in fashion are external factors which are responsible for throwing out of assets even if those are in good condition. For example black and white televisions have become obsolete with the introduction of color TVs, the users have discarded black and white TVs although they are in good condition. Such as loss on account of new invention or changed fashions is termed as obsolescence.
5. Other Causes
Market value and accident of an asset are other causes of depreciation which decrease in the value of assets. .
Concepts of capital & revenue
* Capital and revenue expenditures
* Capital and revenue receipts
* Capital and revenue losses
* Capital and revenue profits
* Capital and revenue reserves
The expenditures which generates revenue or income is called capital expenditure. Capital expenditure incurred either for buying permanent assets or for improving their exiting working capacity. Capital expenditure helps in increasing production volume or decreasing cost of production. Such expenditures are shown on the asset side of balance sheet.
Items relating to capital expenditure
* Expenditure incurred in buying transporting and installing a permanent asset. * Expenditure incurred in overhauling and installing an old asset to put it in production process. * Cost of registration and legal charges incurred in buying or constructing a permanent assets. * Expenditure incurred in improving or extending the working capacity of an existing asset. * Expenditure incurred in getting benefits over a number of years. * Expenditure incurred in raising capital like brokerage and commission for underwriting shares and debentures.
Any expenditure incurred in connection with the operation and administration of daily activities of the business is called revenue expenditure. Revenue expenditure is incurred for maintaining earning capacity and working efficiency of the fixed assets. Revenue expenditure is incurred for acquiring merchandise for resale either in its original or improved form. Its benefit expires within a year. Revenue expenditure is shown on debit side of the trading and profit and loss accounts.
Items relating to revenue expenditure
* Expenditure incurred in acquiring raw materials for manufacturing process or finished goods for resale. * Wages and all other items of manufacturing expenses
* All items of office, administration, selling and distribution expenses * Repair, maintenance, and depreciation of all the fixed assets. * Interest on loan and other financial expenses.
| Revenue Receipts
(a) Receipts derived from activities which are not part of the normal trading activities of the business
| (a) Receipts related to NORMAL ACTIVITIES of the business
| (b) Appears as capital or liabilities in the...
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