Short Answer

Depreciation is charged on fixed assets that are used in business for a long period of time. These assets include machinery, buildings, furniture, vehicles, and equipment, which lose value due to use and time.

It is not charged on current assets like cash, stock, or debtors because they are used or converted into cash within a short period. Only those assets that have a useful life and decrease in value are depreciated.

Detailed Explanation:

Types of assets for depreciation

Fixed assets

Depreciation is mainly charged on fixed assets. Fixed assets are long-term assets that are used in the daily operations of a business. These include machinery, plant, buildings, furniture, fixtures, vehicles, and equipment.

These assets are not purchased for resale but are used to produce goods or services. Over time, they lose their value due to continuous use, wear and tear, and passage of time. Therefore, depreciation is charged to reduce their value gradually in the books of accounts.

Tangible assets

Depreciation is applied to tangible assets, which means assets that have a physical form and can be seen or touched. Examples include machines, office furniture, buildings, and vehicles.

Since these assets are physically used, they are subject to damage, wear and tear, and aging. As a result, their value decreases over time, making depreciation necessary.

Assets with useful life

Depreciation is charged only on those assets that have a limited useful life. Useful life means the period during which the asset is expected to be used in the business.

For example, a machine may have a useful life of 10 years, while a vehicle may last for 5 years. Since these assets do not last forever, their cost is spread over their useful life through depreciation.

Assets used in business

Depreciation is charged only on assets that are used for business purposes. If an asset is not used in business operations, depreciation is generally not recorded for accounting purposes.

For instance, if a company owns a building but does not use it for business activities, depreciation may not be charged in the same way as for actively used assets.

Assets on which depreciation is not charged

Current assets

Depreciation is not charged on current assets such as cash, stock, debtors, and bank balance. These assets are short-term in nature and are either used or converted into cash within one year. They do not lose value in the same way as fixed assets.

Intangible assets

Generally, depreciation is not charged on intangible assets like goodwill, trademarks, and patents. Instead, these assets are written off using a process called amortization. Intangible assets do not have a physical form, so depreciation is not applied in the usual sense.

Land

Land is a special type of asset on which depreciation is usually not charged. This is because land does not lose its value over time and often increases in value. Therefore, it is not depreciated like other fixed assets.

Importance of selecting correct assets

Selecting the correct assets for depreciation is very important in accounting. If depreciation is charged on wrong assets, it can lead to incorrect profit calculation and wrong financial statements.

By charging depreciation only on suitable assets like fixed and tangible assets, businesses can maintain accurate records and present a true financial position. It also ensures compliance with accounting principles and standards.

Proper classification of assets helps in better decision-making, financial planning, and tax calculation. It also helps businesses understand how their assets are being used and how their value changes over time.

Conclusion

Depreciation is charged mainly on fixed, tangible assets that have a limited useful life and are used in business operations. It is not applied to current assets, land, or most intangible assets. Correct application of depreciation ensures accurate financial reporting and proper management of business resources.