Question

Explain the concept of depreciation. What is the need for charging
depreciation and what are the causes of depreciation?

Answer 1

Depreciation is an integral part of accounting. It is needed to meet the matching principle of accounting and its causes include wear and tear.

Explanation:

Depreciation is an integral part of accounting. This method is used for allocating the exact cost of a asset over its life expectancy. It is a method that basically shows the exact value of an asset after it has been used up. The concept of depreciation has two most common methods, which are straight-line and double-declining balance method.  

The needs for charging depreciation is as follows:

i. It shows an assets obsolescence over a time period.

ii. It helps to manage the working capacity of an asset.

iii. It is needed to meet the matching principle of accounting.

There are various causes of depreciation, which are as follows:

i. Perishability of assets.

ii. Wear and tear

iii. Due to inefficiency of the assets.