What is Depreciation?

Definition. Meaning:

The common English meaning of the word is devaluation or reduction in the value of an asset. This fall in value may be for many reasons including normal wear and tear, fall in market price and so on. However in accounting/ financial parlance the word depreciation is used in the sense of normal wear and tear of fixed assets on account of use and time.

Depreciation is treated as an expense every year while computing the profits and drawing up the ‘Profit & Loss Account’ of a business.

Picture showing depreciation of factory assets due to normal wear and tear

Methods of Calculation:

Depreciation is calculated usually under two methods:

1. Straight-line: The residual value of the asset is written off equally over the useful life of the asset. Results in uniform charge throughout.
2. Written Down Value: At the end of every year the depreciation charged during the year is reduced from the value of the asset (written down value). In the next year the depreciation rate is applied on the written down value. Results in higher depreciation in the initial years and lower charge in latter periods.

Conclusion:

Depreciation is an expense arising out of normal wear and tear of fixed assets due to use and passage of time. It is charged off as an expense every year in the profit and loss statement.

What are Current Assets?

Meaning:

The current means present, immediate, recent and so forth. Therefore, current assets are those assets that are meant and expected, to be converted into cash in an operating cycle quickly or immediately. In the accounting parlance one year is the accepted time period. Therefore all the assets that are expected, to be converted into cash within a year are called current assets.

On the other hand assets that are meant to be held for a long period or for period exceeding one year are called fixed assets or non-current assets.

Examples of current assets:

1. Cash and bank balances
2. Trade receivables also called sundry debtors
3. Inventories or stocks of raw materials, semi-finished and finished goods, consumables, spare parts, etc.
4. Temporary loans and advances that will either be returned or charged to expenses within a year, etc.

Examples of Various Current Assets

Importance/ Significance:

Holding adequate current assets in various forms is both inevitable as well as mandatory for the smooth and uninterrupted operations. Additionally, holding adequate current assets is vital for the liquidity of the organization, meaning ability to make timely payments to suppliers and meeting expenses. Employing adequate current assets thereby improves the current ratio - another important financial indicator.

Having emphasized the need for adequate current assets for the short term health of the company, excess current assets is not a good sign, indicating inefficiency of the operations.

What is Short-Covering?

Short covering is the corrective action for short selling. It is the reverse of short selling. A speculator makes a bet that the price of a particular scrip or share is likely to fall and short sells. The price may go against his or her expectations and may instead rise. In this situation he or she will now have to buy the shares immediately, to honour previously short sold (cover the sale) as well as minimise the loss - as if the buy decision is delayed the price may climb even higher increasing the loss. 

Short selling, short covering and so on are purely speculative activities and are NOT-AT-ALL considered as investing.

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