Causes of Depreciation:
What are the causes of definition?
The main causes of depreciation may be divided into two categories, namely:
Internal Cause and
Depreciation which occurs for certain inherent normal causes, is known as internal depreciation. The main causes of internal depreciation are:
Wear and Tear:
Some assets physically deteriorate due to wear and tear in use. More and more use of an asset, the greater would be the wear and tear. Physical deterioration of an asset is caused from movement, strain, friction, erasion etc. An obvious example of this is motor car which rapidly wears out. Other assets like this are building, plant, machinery, furniture, etc. The wear and tear is general but primary cause of depreciation.
Some assets declines in value proportionate to the quantum of production, e.g. mine, quarry etc. With the raising of coal from coal mine the total deposit reduces gradually and after sometime it will be fully exhausted. Then its value will be reduced to nil.
Depreciation caused by some external reasons is called external depreciation. The main external causes are as follows:
Some assets, although in proper working order, may become obsolete. For example, old machine becomes obsolete with the invention of more economical and sophisticated machine whose productive capacity is generally larger and cost of production is therefore less. In order to survive in the competitive market the manufacturers must must install new machines replacing the old ones. Again, it may happen that the articles produced by old machine are no longer saleable in the market on account of change of habit and taste of the people. In such a case the old machine, although in good working condition, must be discarded and the new one purchased.
Eflux of Time:
Some assets diminish in value on account of sheer passage of time, even though they are not used e.g., leasehold property, patent right, copyright etc. Suppose we take a lease of a house for 10 years for $10,000. Its annual depreciation will be $1,000 (10,000/10), irrespective of the the whether the house has been used or not. Because with the end of lease after 10 years, the house will go out of possession.
Assets may be destroyed by abnormal reasons such as fire, earthquake, flood etc. In such a case the destroyed asset must be written off as loss and a new one purchased.
You may also be interested in other articles from “accounting for depreciation” chapter:
- Definition and Explanation of Depreciation
- Causes of Depreciation
- Need for Depreciation
- Depreciation, Depletion and Amortization
- Difference Between Depreciation and Fluctuation
- Basic Factors of Determination of Depreciation
- Depreciation Methods / Methods for Providing Depreciation
- Fixed Installment Method / Straight Line Method / Original Cost Method
- Diminishing balance/written Down Value/Reducing Installment Method of Depreciation
- Annuity Method of Depreciation
- Depreciation Fund Method or Sinking Fund Method
- Insurance Policy Method of Depreciation
- Revaluation Method of Depreciation
- Sum of the Years’ Digits Method of Depreciation
- Double Declining Balance Method of Depreciation
- Depletion Method of Depreciation
- Basis of Use System of Depreciation
- Depreciation Of Various Assets
- Depreciation Accounting – General Questions and Answers
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