Depreciation 1 Continued

Depreciation 1 Continued

Depreciation. (1) Continued decrease in quantity, quality or value of an asset because of passage of time, wear and tear, obsolescence, fall in market prices or other causes.

Depreciation allowances are charges against the income of a business (before profits are calculated) and represent the benefits the business has derived from the use of the assets: they reflect the principle that the use or consumption of an asset must be included as a charge for running the business.

Methods of dealing with depreciation include (a) the Straight Line Method, under which the original cost, divided by the expected number of years of life, is charged as an annual cost: this method has the advantage of simplicity; (b) the Diminishing Balance Method, tinder which a fixed percentage is deducted each year from the diminishing balance of the value of the asset: the chief advantage is that depreciation charges are highest in the early years of the life of the asset when maintenance and repair charges are small; (c) the A innuity and Sinking Fund Methods take account of the interest which the capital invested in the asset is assumed to earn. Under the annuity method the asset is valued at cost price plus interest and then written off on the straight line method; a regular sum is thus set aside each year sufficient when invested to accumulate at compound interest to provide an eventual sum equal to the cost of the asset. A variant of this method is to make like annual payments as an insurance premium.

In order to take account of changing values and prices, the asset may be revalued each year and depreciation recalculated. In Britain the Inland Revenue authorities will not allow any such additional sums to be charged against taxable income; they permit only the capital allowances as laid down by statute.

Depreciation (2) A change in the value of a currency by which the currency becomes cheaper (i.e. has a smaller exchange value) in terms of foreign currencies.

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