Characteristics of Depreciation

Depreciation has the following characteristics or attributes:

(1) Depreciation is only charged on non-current assets.

(2) Depreciation occurs from the date of purchase of an asset, till the last day of its estimated useful life.

(3) The amount of annual depreciation cannot be exact as it has to be estimated.

(4) It represents gradual and continuous reduction in the value of asset.

(5) Depreciation is charged against income of the relevant accounting periods over the useful life of the asset.

(6) Depreciation does not consider fluctuations in market value of assets, so depreciation may be charged even in the year in which market value is increased.

(7) Total depreciation charged on an asset over its useful life cannot go beyond its depreciable value (cost less residual value).

(8) Land is not a depreciable non-current asset.

(9) Depending upon the nature of the asset, businesses may choose any depreciation method to calculate the annual depreciation charge.

Why Depreciation is provided for?

Depreciation is a major expense of a business and is charged to determine the true net profit for an accounting period. A business expects that its non-current assets will generate the necessary revenues over their useful lives. The matching concept of accounting, therefore asserts that the cost of using these assets has to be allocated against revenues of the relevant accounting periods otherwise the profits will be overstated.

If the depreciation charge is not provided for then the value of non-current assets will be overstated in the balance sheet. In fact the business should only show the unused part of the cost of these assets in the balance sheet.