Define depreciation explain causes of depreciation
Answers
Depreciation can be easily defined as a reduction in the carrying amount of a fixed asset. Depreciation is equated with a value of consumption of the asset for a specific period. Over the span of an asset, over which it is considered usable, depreciation brings down the value of the asset to a salvage value.
Following are the causes of depreciation:
Wear and Tear of the Asset
Every machinery or tool is bound to undergo wear over a period of time. There will be parts that may need replacing or repairing. Usually, such assets have a fixed span of life, after which, they need to be scrapped. This wear and tear of the asset must be accounted for in financial terms, hence depreciation.
Perishability of Inventory
Items such as raw material and inventory, undergone deterioration over a quick span of time. This is faster in relation to a fixed asset, which normally lasts for a few years at least. This perishability of assets is a point of consideration for depreciation accounting.
Usage Right Expiration
Some assets such as software and licenses have a typical span over which it can be used. As soon as this time span finishes, the owner has to give up using the asset. So the depreciation of this asset must be done over time, it cannot just be written off on the day of expiration.
Obsolescence
Another cause of depreciation is the obsolute nature of certain assets. Over a period of time, every asset loses its novel value. A new alternative can always be developed for replacing the asset and its functions.
hope it helps..
Depreciation is charged on fixed assets, it is the normal wear and tear in the value of fixed asset.
Fixed Asset like plant and machinery, land and building, furniture and fittings tend to lose their utility for the business operation with the usage, with the passage of time, thus in decline of quality and quantity of fixed asset is known as deprecition.
The major causes of depreciation are-
By constant use - The value of fixed asset decline due to constant use.
By obsolence - Some of the fixed asset are discarded before their expected life.
Loss due to accidents
By depletion
By expiry of time
Continuous decline in the market price of asset