Book depreciation

Depreciation is the systematic allocation cost of an asset to its useful life.

Depreciation expense is recognized to expense out the cost of asset pertaining to a specific period of time (because of the requirement of an accounting principle known as "Matching principle".) and depreciation expenses helpful for an entity to lessen tax liability (used as tax shield ). Since an entity show depreciation expense under the head "operating expenses" in income statement depreciation expenses reduce net income of an entity, therefore decrease in income tax liability

Double entry for deprecation

Deprecation expenses                                        DR 

           Accumulated deprecation expenses                             CR


Deprecation expenses 
Deprecation expenses are referred as the current financial period deprecation expenses of an asset 

Accumulated deprecation expenses
Accumulated depreciation is cumulative, accumulated or the sum of all current and previous financial periods’ depreciation expenses of a fixed asset. Accumulated depreciation account usually has credit balance and it is subtracted from the cost of relative fixed asset in balance sheet

There is another type of depreciation where the decrease in the value of an asset is taken as deprecation. In contrary to above situation it doesn't effect net income but value of business entities

Depreciation expenses are calculated using various methods. Different entities adopt different method of deprecation calculation based on their financial situation and tax shield purposes
  • Straight-line depreciation
  • Declining-balance method or Reducing balance method
  • Sum-of-years' digits method
  • Units of time depreciation
  • Units-of-production depreciation method
  • Annuity method of depreciation 

There are some bases on which depreciation methods are used. For example:
  • No depreciation in the year of purchase and full deprecation in the year of sale or disposal of an asset 
  • Full deprecation on assets which remain at the balance sheet date
  • Time proportionate deprecation method

Important to NOTE that: 
In most of cases the non current asset "land" is not depreciate because on its infinite useful life

However land is depreciate in the following situations:
  • Land will be taken by government (nationalization) in future 
  • Land will be destroyed because of river changing its direction 
  • There is a legal restriction on its future use
  • Land at the sea-shore will be occupied by sea because of increasing water level in sea
  • Land sliding when land is located in mountains area 
    Land can't be depreciated if its useful life is not determinable with certainty