Type: Controversial Essays
Sample donated: Tanya Burgess
Last updated: July 26, 2019
Depreciation accounting is as oldas the business system. It has been mostly treated as a topic for accountingtheory. As a result complete and independent texts on this subject are not toomany. At the same time, being a topic of vital concern to ongoing business, ithas received considerable attention from experts and researchers in businessjournals and professional conventions particularly in period of inflation. Somedoctoral researches are also found in this field. The main motive of thisreview is to have a look on the perceptive articles and academic researchoutputs. No doubt much has been said on the subject of depreciation still it isa controversial topic.
As Sidney Davidson and others (1956) in bookfundamentals of accounting comment on depreciation,” on no subject inaccounting has there been so much written and so much as confusion as on thesubject.” The subject of depreciation is controversial and it also createsconfusion. The experts are agreeable on this point but they seem to be criticalagainst the work done in this area by other, as most of the articles availablein the literature of depreciation accounting are mostly the critical review ofthe work done by the others.
This review is intended to provide a background tostudy that is being undertaken. Now we will consider different empiricalstudies as well as other literature (articles and research works) pertaining todepreciation. The researcher has tried to analyze the literature availableObjective of studyFollowing is the sole objectiveof study:· To study the views of variousauthors regarding the different aspects of depreciation worldwide.StudyFor reviewing the literature depreciation is studiedunder different heads viz. purpose(s) of providing depreciation (as forreplacement of asset, for amortization of asset, for addition to cost ofproduct), methods of depreciation, under changing price levels, depreciationand taxation and last but not least depreciation as source of fund. The viewsof various authors have been compiled for the study in hand.
Depreciation for replacement ofassetsMason (1935) critcised the concept of depreciationbeing used as provision for replacements. In an article “Depreciation andFinancing of Replacements” he explained that the philosophical concept ofdepreciation as a provision for replacements was indefensible. It was illogicalit had been leading to an inequitable distribution of costs and to misleadingstatements of income and financial condition. Edwards (1961) extended hiscontribution to the existing literature by presenting an article”Depreciation and the Maintenance of Real Capital”. In this studydifferent concepts of replacements, in terms of their economic significance andtheir relevance to the determination of depreciation charges under number ofcircumstances including stationary conditions, growth, price and price levelmovements and changes in demand and technology, had been explored. The studysuggested that if depreciation was viewed as measure of funds necessary shouldthe firm wish to replace exhausted service values, the concept of physicalreplacement, must be discarded and a concept based on value, specificallycurrent value, substituted for it.
Rathor (1966) considered depreciation as atechnique of conserving funds in an organization for the replacement ofdepreciated assets. Charles (1966) considered depreciation as an accountingprocess of amortising the cost of an asset over its useful life and it wouldnot provide fund for replacement of a particular asset or assets. Majumdar(1977) in his research titled “Replacement Accounting for Fixed assets”,concluded from several case studies that there was a greater tendency fordepreciation provision to be invested internally, there was no instance wheredepreciation provision was found to be invested externally and the internalinvestments tendered to be in current assets. This study was not able to traceto what extent depreciation provisions were utilized for replacing of fixedassets. Ebling (1987) explained the purpose(s) of providing depreciation were toprovide for the future replacement of assets, to reflect the loss of the valueof fixed asset during its life and to allocate cost against revenues.
Depreciation for Amortization of Fixed AssetsGrady (1950) suggested that provisions for amortisation of depreciabletangible fixed assets must be made regularly, the condition of the depreciableproperties must be studied regularly e.g every five years so as to revise theannual amortisation, if necessary and Production method of amortisation mightbe adopted if the business enterprise is subject to the important variations inthe volume of the business. Charles (1966) considered depreciation as anaccounting process of amortising the cost of an asset over its useful life andit would not provide fund for replacement of a particular asset or assets.