Learning Materials For Accounting, Management , Finance And Economics.

Thursday, July 15, 2010

Major Causes Of Depreciation

There are several causes of depreciation such as exhaustion, obsolescence, wear and tear etc. Main reasons or causes of depreciation can be expressed as follows:

1. Wear And Tear

wear and tear refer to a decline in the efficiency of asset due to its constant use. When an asset losses its efficiency, its value goes down and depreciation arises. This is true in case of tangible assets like plant and machinery, building, furniture, tools and equipment used in the factory.

2. Effusion Of Time

The value of asset may decrease due to the passage of time even if it is not in use. There are some intangible fixed assets like copyright, patent right, and lease hold premises which decrease its value as time elapse.

3. Exhaustion

Exhaustion is another cause of depreciation. An asset may loss its value because of exhaustion too. This is the case with wasting assets such as mines, quarries, oil-wells and forest-stand. On account of continuous extraction, a stage will come where mines and oil-wells get completely exhausted.

4. Obsolescence

Changes in fashion are external factors which are responsible for throwing out of assets even if those are in good condition. For example black and white televisions have become obsolete with the introduction of color TVs, the users have discarded black and white TVs although they are in good condition. Such as loss on account of new invention or changed fashions is termed as obsolescence.

5. Other Causes

Market value and accident of an asset are other causes of depreciation which decrease in the value of assets.