Depreciation Reserve & Provisions Under Price Level Changes: [An Overview of Legal & Accounting Aspects of Small Scale Industries]

Author:V. P. Singha* and A. P. Singhb

Abstract:
Depreciation is the deterioration of the physical and functional utility of a fixed asset due to its usage and passage of time.  Accounting for depreciation is a way of writing off the investment on fixed assets by prorating over a certain period of time of its usage. Ordinarily, depreciation accounting is designed, to recover simply the number of monetary units originally committed to the asset irrespective of differences in their purchasing power. This is quite satisfactory in periods of relative price stability but can be seriously, and even ruinously inadequate during period of relentless inflationary pressures with sharp drop in the purchasing power of the monetary unit. Valuation of fixed assets in real prices is very important for the following: economic analysis and forecasting of the development and use of the economic potential; identification of parameters of investments, and setting depreciation policies at the macro level and micro level. The value of fixed assets determines the size of property tax, depreciation charges, profit tax, etc. While going over to a market economy, India has been facing high inflation, which is typical of a transition period, and reevaluations had to be made more frequently than during the earlier period.

Keywords:Key Words: Financial Statements, Purchasing Power, Economic Potential, Economic Analysis, Consumer Price Index, Capital Conservation Reserve.

DOI:

International Journal of Trade & Commerce (Vol: 1 Issue:1)