Features of Depreciation

Depreciation is the term used in the context of accounting of fixed assets; it refers to reduction in value of the fixed asset due to continue usage, lapse of time and normal wear and tear. Let’s look at some of the features of deprecation –

  1. The first and foremost feature of depreciation is that it is a non cash expense for the company implying that depreciation does not involve any outflow of cash for the company and it is shown as an expense and hence in a way it reduces the profit of the company which in turn reduces the tax liability of the company.
  2. Multiple methods of calculating depreciation is another feature of depreciation, suppose there are two companies working in the same industry company A can use straight line method and company B can use written down method and hence in a way depreciation provides flexibility to companies when it comes to which method to use.
  3. Depreciation is prone to manipulation because companies change the method of depreciation in order to hide the real profit figure. For example if company wants to show lower profit figure it will adopt written down value method on newly purchased asset because in initial years in written down value method deprecation is high and in later years it is low.
  4. Depreciation is allocation of costs to the period of useful life of asset because expenditure on asset is done by the company on purchase of asset at one go, but since asset is used for long period of time the use of asset is shown in the form of depreciation every year and not in the year in which asset is purchased. Hence in simple words depreciation is the process of writing off capital expenditure which has already done by the company.
  5. Depreciation is a tax deductible expense hence it must be deducted from operating profit in order to arrive at taxable profits and hence it reduces the taxable liability of the company.
  6. In order to calculate depreciation three factors are taken into consideration one is purchase price which includes apart from cost of asset also expenses incurred for getting the asset ready for use, second factor is residual value of asset after its complete use and third factor is estimated useful life of asset.
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