What is Depreciation? Also its types.

Depreciation is the spreading of depreciable amount of an asset over its useful life.
To understand this definition completely. First we should know about what is an asset? , what is its useful life? or what is its depreciable amount?

So we start from asset.

Asset:
In simple words, asset is that thing which gives benefit in future to us. Like Money(gives future benefits), Machinery required for production (future benefits) e.t.c.

Asset's useful life:
It is simple, if you understand what is asset.
It's useful life is that period in which you want to use your asset.
For example :
I want to use my car for 5 years so 5 years is its useful life.

What is its depreciable amount:
You know if we want to sell any used thing in market so we get some bucks from that thing so that bucks is known as it's scrap value.
Scrap value is also called residual value.

Similarly, if we want to sell any used asset so we get some money from that particular asset. That some money is known as it's residual value.

Finally, if we cut the residual value from the cost of that particular asset so the remaining amount is called it's depreciable amount.

So again depreciation is the spreading of depreciable amount over it's useful life. Depreciation is treated as expense.

In simple words, depreciation is decrease
in the value of an asset.
For example.
If we want to use an asset for 5 years. It is purchased for Rs 110 and it's residual value(scrap value) is Rs 10.
So how we got the depreciation of this asset.

Depreciation = Depreciable amount/ useful life

Depreciation = 110-10/5
Depreciation 100/5
Depreciation =20.

So we do same work in remaining 4 years and then we sold this asset.

Now we discuss it's types.

1. Straight Line Method
2. Reducing Balnace Method
3. Units of Production Method
4. Sum of Years Digit Method.

We only discuss its names only.
Thank you for reading this post.