Concept of Depreciation and its Provisions

The word depreciation is related to the subject of accounting in which depreciation is a process of gradual and permanent reduction in the values of those asset is decreased after the maturity of time the asset time duration the asset is now in no more use because it does not possess that utility for which organization has bought that asset.

The asset which are bought and depreciated after its use can be the automobiles like car, van, bus etc and it can be the machinery plant and so on.

Assets by nature and by use cannot last forever it has its life and after some decades or may be within decade the asset becomes expire due to its wear and tear situation thus the reduction which takes place due to many reasons is a business loss like other operating expenses of the business.

For such type of loss the companies always keep their provisions in order to meet and overcome that loss so that the process of carrying business on the peak must be keep on going, there should be any hindrances for business which cannot let the business to run smoothly.

There are so many types of provision that company keeps such as Provision of Debt, Provision for Doubtful Debts, Provisions for any contingencies and Provision for Depreciation as well though there can be more provisions than the described but because we are only focused with the provision for depreciation so here we are going to discuss that provision only.

First of all lets do understand why the depreciation occurs what are the reasons behind the depreciation, the depreciation or the reduction takes place in the values of fixed assets on account of the following reasons:

Wear and Tear of the Asset: Companies do have the fixed assets like building machinery automobiles and other assets due to its use the assets loss its potentials they do not possess such energy that it has previously it decreases day by day.

Passage of Time and Exhaustion: Each asset no matter what type of it is, everything has its time for its finish once it has completed its maturity time it becomes now no more in use, assets are consumed as well which sometimes applies in the mines and quarries, the values of which go on diminishing.

In nutshell provision is simply mean that it is funds which is maintained by the companies to meet its future need for the profit which is earned by the company.

Leave a Reply

Your email address will not be published. Required fields are marked *