Depreciation

The costs relating to the use of long-term assets should be properly calculated and matched against the revenue earned so that periodic net income can be determined. These use costs or expense or periodic write off are known by different names for different category of assets as shown below:

Types of Long-term Assets                                                                          Term of expense or write off

1.       Tangible Assets

i.                     Land                                                                                       None

ii.                   Plant, Building, equipment tools,                                          Depreciation

Furniture, fixtures, vehicles, etc.                                                                                      

iii.                  Natural resources such as coal, oil etc.                               Depletion

2.       Intangible assets such as patent, copyrights,

Trademarks, goodwill                                                                       Amortisation

The term depreciation refers to periodic allocation of the acquisition cost of a tangible long-term asset over its useful life. These long-term or fixed assets have a limited useful life, that is, they will provide service to the entity over a limited number of future accounting periods. Depreciation makes a part of the cost of asset chargeable as an expense in profit and loss account of the accounting periods in which the asset has helped in earning revenue. Thus, allocating the capitalised cost of an asset into expense for different accounting periods is known as depreciation.