Depreciation of Non-Current Assets

Abstract

Generally, all firm have assets which are referred to as Non-current assets or fixed assets. These assets are not to be resold because they are permanent in nature and are specifically used for the purpose of generating or earning revenue and as such during each accounting period some of the historical cost of the assets must be charged to the profit or loss account before the true profit can be ascertained. Depreciation is the process of spreading the cost of non-current (fixed) assets over a period of time of its life. It is the assigned depletion in the value of non-current assets occurring in connection with human and natural causes.  In otherwords, it is the allocation of the costs of non-current assets over its useful life.  Non-current assets and other material assets used for the generation of revenue by firms reduce in their values as years go by such that their values will get to nil after certain years of usage.  Companies use depreciation to accumulate yearly reserves to provide for the replacement of the assets so depreciated. While depreciation is the reduction in the value of non-current assets arising from usage, natural causes or technological advancement; provision for depreciation is a form of yearly reserves in order to replace the asset when it had completely worn off, or its book value exhausted.  Depreciation charge is not an expenses in real sense but a provision for future expenses. Items of non-current assets that are normally subjected to depreciation include building, machineries, equipment, leasehold assets, motor vehicles and other locomotives, furniture and fitting, investment assets and any other assets that is non-current. These are otherwise called property, plants and equipment (PPE).  Assets are said to be non-current when their convertibility to liquid or near-liquid (cash) is difficult and or when their values cannot be written off against the income statement within one accounting period.