Whenever a business is being set up, it is taken for granted that it will be continued for an indefinite time period and that too with high-profit rates. Hence, to ensure that the business continues in a correct manner, it is imperative that there should be certain assets which can be used to continue with the production process.
However, after a certain period of time, the assets that are there tend to lose its original performance value and face a series of wear and tear. This loss of value of an asset due to wear and tear after a certain point of time is known as Depreciation. Those assets which increase the rate of profitability of the business after a certain point of time becomes liability for that business is known as Depreciation.
The noted economist, R.N. Carter states Depreciation to be a permanent decrease in value of an asset due to certain causes.
Also, as per views stated by W. Pickles, Depreciation is specifically defined as permanent decrease in the quantity, quality and overall value of the asset.
As per the Institute of Cost and Management Accounting-London (ICMA), Depreciation can also be termed as a decrease in intrinsic value of a particular asset with a lapse of time.
Finally, the best way to define this concept comes from Accounting Standard, that states, this concept to be a measurement of wearing out or consumption of loss of value of that depreciable asset that arises from usage of technology in a greater sense or due to certain market changes.
Example: Let us take an example of a machine. When it is first purchased in the year 2006, it has the highest productivity for the company and therefore can be termed as one of the most important profit-generating assets for that company. However, after consistent usage, in year 2008, it undergoes wear and tear and therefore its productive value reduces. This loss of value due to wear and tear is known as Depreciation, and it is a normal process with almost all the machinery.
As per the rules stated by Accounting Standard, every company should make provisions for dealing with this Depreciation issue to protect the company.