Depreciation is very important for any business because it
affects its profit and loss, balance sheet, it is a typical
item and people do not know its concept well.
Let's see what is depreciation.
It is a reduction in the value of an asset on account of
usage or passage of time or obsolescence.
It is allocation of cost of the fixed asset in each
accounting year due to its expected useful life.
I would like you to focus more on the second line.
The first line does not mean depreciation.
Its result is on the second line.
It is the allocation of cost of the fixed asset in each
accounting year during its expected useful life.
I will try to present this through an example of what
depreciation is.
Let me take an example.
We bought a machinery.
Let's run on the pad for this.
It will be better to run on the pad for this.
It will be better to understand the meaning of depreciation
by clicking.
Let me open the pad.
Here we are on the pad.
Let's write here and understand.
We bought a machinery.
Sir, when did you buy the machinery? 1st of April 2023.
Sir, we are buying on 1st April.
We are not making April Fool.
We are really buying.
If we make April Fool, how will we understand the concept?
We bought the machinery on 1st April 2023 for 10 lakh
rupees.
And it was told that this machinery will run for 10 years.
Or let's take 5 years.
10 years will be a long time to explain.
Its expected life is 5 years.
It was told that it will run for 5 years.
Now friends, tell me one thing.
We make profit and loss accounts every year.
To know whether there is profit or loss in the business.
Absolutely sir.
We make profit and loss accounts every year.
Our profit and loss account is the most important part of
business accounting.
It tells whether the business is running in profit or loss.
It is made every year.
It has two sides.
One is the debit side and the other is the credit side.
All expenses and losses are written on the debit side.
All incomes and gains are written on the credit side.
Expenses and losses are minused from income and gains.
And then we finally know whether there is profit or loss.
Profit or loss.
As I told you, we have to write all expenses on the debit
side.
We have to write all expenses on the debit side.
We have to write all expenses.
So friends, tell me.
I have spent Rs. 1,23,00,000 on machinery.
Which year is this? 1 April 23 means 23-24 years.
1 April 23 means 31 March 24.
Means 23-24 financial year.
Yes, absolutely right.
1 April 23 means 23-24 P&L.
Assume this P&L is the first one.
23-24 P&L.
So friends, let's write on the expense side.
2 Machinery Rs. 10,00,000.
If we do this.
You must be thinking.
Yes, absolutely right.
We have spent Rs. 10,00,000 on machinery in 23-24.
Whether you have paid or not.
Don't worry about that.
Now some people will start thinking.
Sir, tell me whether it has been paid or not.
Then what to understand.
Accounting is on an accrual basis.
Expenses means you bought the machine.
That's it.
Accounting is on an accrual basis.
And accounting is always done on an accrual basis.
So we have written here.
Machinery Rs. 10,00,000.
Absolutely right.
But friends.
There is a concept of accounts.
Which is called matching concept.
There is a concept of accounts.
Which is called matching concept.
What is matching concept of accounts.
That is.
Expenses of Rs. 10,00,000.
Will benefit you for 5 years.
Expenses of Rs. 10,00,000.
You will run the machinery for 5 years.
You will make goods for 5 year.
You will sell the goods.
You will make profit.
This Rs. 10,00,000 will benefit you for 15 years.
This Rs. 10,00,000.
It would prove beneficial for you.
For the next 5 years.
The matching concept says.
That Rs. 10,00,000 has been spent for 5 years.
That has not been done for 1 year.
That's why you do for 5 years.
That's why you divide it into 5 years P&L
Divide this 10 Lakhs expenditure into 5 years
Don't call it 23-24 Lakhs expenditure
Call it 5 years expenditure 2 Lakhs, 2 Lakhs, 2 Lakhs, 2
Lakhs and 2 Lakhs
And it is also permissible
If you book 10 Lakhs in first year
Then you will be earning money by selling goods for next 4
years
But you won't tell that you bought machinery to make goods
Then in next 4 years P&L account information will be
incomplete
Money will come and go
It will not be known
From where did you buy machinery to earn money
How much did you buy
That's why friends
We divide this expenditure into 5 years
Because of matching concept
And friends
If I write here 5 times 2 Machinery 2 Machinery 2 Machinery
2 Machinery 2 Machinery
Then also there is a problem
Now what is the problem sir
It seems that you bought machinery for 2 Lakhs 5 times
That's why
What we do
By changing the name
We put depreciation
We change the name
We put depreciation
From this we get to know
Machinery is the same
But its cost is divided into 5 years
Machinery is not of 2 Lakhs 5 times
Machinery is of 1 or 10 Lakhs
Its cost is divided into 5 years 2 Lakhs 2 Lakhs 2 Lakhs 2
Lakhs 2 Lakhs
It is given the name of depreciation
That is
A fixed asset
That is a non-current asset
PPE Property Plant and Equipment
Like Machinery
Its cost is
Its purchase price is 10 Lakhs
Allocate its life in 5 years P&L
Distribute It is called depreciation
And this is written here
This is written in our notes
Let's check it out
It is a fall in the value
Of an asset on account of
Remove this line once
It is allocation of
Cost of the fixed asset
In each accounting year
During its expected useful life
Distribute the cost of the asset in life
Its life was 5 years
So the expense of 10 Lakhs
Was distributed in 5 years 2 Lakhs
This is called allocation of
Cost of the fixed asset
Sir, tell me the above line
If it is written, then why is it written?
There must be some reason for it
It is fall in the value
Of an asset
On account of usage
And passage of time
And obsolescence
What does this mean?
Take this friend
Along with P&L
We also make balance sheets
We don't just make P&L
Balance sheets will also be made for 5 years
In 5 years
On the last day of 5 years
Balance sheets will also be made
Balance sheet
Yes sir
Okay Will we write the machinery on the side of the asset?
Yes sir
Because machinery is an asset for us
So the right-hand side in the balance sheet
Is that of assets
In that we will write our asset machinery
Will run for 5 years
How much will you write in the first year? 10 Lakhs was the
whole machinery
After that
If you put your deposition from 2 Lakhs
Then it will remain of 8 Lakhs
From the cost of 10 Lakhs
You have transferred the cost of 2 Lakhs
In P&L
Look at this at the end of the first year
Then how much will it remain?
Then it will remain 8 Lakhs
Then when you transfer 2 Lakhs more
Then after that it will remain 6 Lakhs
Then if you transfer 2 Lakhs more 4 Lakhs will remain
Then 2 Lakhs more
Then 2 Lakhs will remain
And in the next year's balance sheet
Machinery will not be visible
Because the whole 2 here 2 here 2 here 2 here 2 here
You have allocated 10 Lakhs
It will become 0
So what happens
Depreciation means
Machinery value
Out of 10 Lakhs
How much ever you are transferring
In P&L
That is depreciation 2 out of 10 Lakhs
You have transferred
In P&L 8 Lakhs will remain
Then 2 Lakhs 6 Lakhs will remain
Then 2 Lakhs 4 Lakhs
Then 2 Lakhs 2 Lakhs
Then 2 Lakhs 0 Lakhs
So friends
You are seeing
In the balance sheet
Machinery value
Is being reduced
Yes sir
It is reduced
So this is not the meaning
Of depreciation
This is the effect
Of depreciation
This is the result
Of depreciation
Although In the definition
Of depreciation
There is a line
But you don't understand
The actual meaning
Of depreciation
This is the result
Of depreciation
It is a fall in the value
Of an asset
On account of usage
Or passage of time
Or obsolescence
Due to time
Or year
Or we are allocating
Cost Due to that
The fall in the value
Of asset
In the balance sheet
Is called depreciation
Ok This was the meaning
Of depreciation
Thank you