Depreciation is the diminution in the value of a fixed asset

Depreciation is the diminution in the value of a fixed asset says a machine due to use and lapse of time. A fixed assets has a span of life during which it render service for production purposes and on the expiry of which, the asset has either no value or has only small scrap value. The life of an asset is enhanced by efficient maintenance and reduced by its extensive use. Through out its life, the machine has been gradually diminishing the value to reach the scrap value at the expiry of its life. The gradual reduction in the value is called depreciation. Depreciation thus is the result of two factors viz., usage and lapse of time. An asset continues to depreciate with the passage of time even if it is not in active service, through the rate of depreciation may be lower. The more the use to which an asset is put, the larger will be the depreciation. If an asset works on two or more shifts, the depreciation may be doubled or trebled. The methods of depreciation take either the usage of time factor or both into consideration while calculating depreciation.

Factors for rate of depreciation of plant and machinery –

The following are the factors to be considered while considering the rate of depreciation of plant and machinery:

• Time factor
• Usage factor
• Element of maintenance
• Element of interest. This is based on opportunity cost i.e. if not invested in machines; the amount would have earned revenue if employed elsewhere.

Thus element of maintenance is one of the factors to be considered. The method of depreciation should provide a uniform charge each period for aggregate depreciation and maintenance cost. The problem of heavy expenses on maintenance in one year and less in another year is avoided under repair reserve method.