Causes Depreciation

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Depreciation:-

    The concept of depreciation refers to the process of allocating the initial or restated input valuation ( cost or other basis ) of fixed assets to the several periods expected to benefit from their acquisition and use.

  The main emphasis of the depreciation process is generally on the computation of the periodic charge to expense or the cost of the product to be matched with the revenues reported in each period.

  Thus the Concept occupies a significant place in the determination of income and in the measurement of service potential of the assets.

    Depreciation is a permanent continuing and gradual shrinkage in the book 📚 value of a fixed asset. Depreciation is charged on the fixed assets only.

    Current assets are never depreciated rather these are valued. Depreciation is charged on the Book 📚 value ( as shown in the books 📚 after charge of depreciation) only, it reduces the value of the asset permanently .

 Depreciation is charged on a continuous basis. Once the depreciation is charged it must be charged on regular basis in the succeeding period also.

   The charge of depreciation will decrease the value of Asset gradually.

  There should not be abrupt changes in the value of fixed assets due to depreciation. It must reduce the value of asset slowly and steadily.

   According to international Accounting standard committee " Depreciation is the allocation of the depreciable amount of an asset over its estimated useful life. Depreciation for the accounting period is charged to income either directly or indirectly ".





Causes of Depreciation:-

  physical Deterioration:-

  It is caused mainly from wear and tear when the asset is in use and from erosion, rust, rot and decay from being exposed to wind, rain 🌧️ sun 🌞 and other elements of nature.


Economic Factors:-

 These may be said to be those that cause the asset to be put out of use even though it is in good physical condition.

   These arise due to obsolescence and inadequacy. Obsolescence means the process of becoming obsolete or out of date. An old machinery through in good physical condition may be rendered obsolete by the introduction of a new model which produces more than the old machinery.

   Inadequacy refers to the termination of the use of an asset because of growth and changes in the size of the firm. But obsolescence and inadequacy do not necessarily mean that the asset is scrapped: it is merely put out of use by the firm . Another firm will often buy it.


Time Factors:-

 There are certain assets with a fixed period of legal life such as lease, patents, and copyrights. For instance, a lease can be entered into for any period while a patents legal life is for some years but on certain grounds this can be extended. Provision for the consumption of these assets is called amortization rather than depreciation.


Delection:-

   Some assets are of a washing character perhaps due to the extraction of raw materials from them. 

   These materials are then either used by the firm to make something else or are sold in their raw state to other firms.

  Natural resources such as mines, quarries and oil wells come under this heading. To provide for the consumption of an asset of a wasting character is called provision for depletion.


Accident:-

  An asset may reduce in value because of meeting of an accident.

  


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