Every business property after a certain point of time and excessive usage faces wear and tear and hence loses some amount of its productivity. It is this aspect of loss of productivity of a particular product that is known as depreciation.
What happens is during a production process, there are multiple factors of production that are used for ensuring a perfect productivity. Some of these factors of production are in the form of heavy machinery and capital goods. It is common knowledge that after a certain point of time that machinery or capital good would face rough wear and tear due to excessive usage on a regular basis. It is this wear and tear and reduced productivity of that particular product that is known as depreciation.
What is important is that there should be special provisions for depreciation of assets which ensures that they may be replaced without massive financial proposition.
Presentation in Final Accounts:
Depreciation is to be counted in a different manner in case it appears in different positions.
Since it is taken that item from Trial Balance is posted on only one side of the column, hence depreciation value will also be posted only on the debit side of profit and loss account.
Initially amount of depreciation on specific assets is to be accounted for at specific rates. After the adjusting entry is passed, the depreciation amount that has been calculated will be passed to the debit side of profit and loss account for further prospects. Since value of concerned asset is released, it is imperative that in the Balance Sheet as well, it will be a reduced price that would be shown.
Thus, it is from this profit and loss account which depicts the actual amount of money that can be taken as depreciation for the company.