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Question
What is ‘Depreciation’?
Solution
Every business acquires fixed assets for its use in the business over a period of time.
As the benefits of these assets can be availed over a long period of time, thus, due to their regular use, there occurs continuous wear and tear and consequently fall in their value.
This fall in the value of fixed assets, due to their regular use or expiry of time is termed as depreciation.
A machinery costing ₹ 1,00,000 and its useful life is 10 years; so, depreciation is calculated as:
Annual Depreciation (p.a) = `"Cost of Asset"/"Expected or Estimated Life of Asset"`
or
Annual Depreciation (p.a) = `10000/10` = ₹ 10,000
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