Causes of Depreciation:
Learning Objectives:
-
What are the causes of
definition?
The main causes of
depreciation may be divided into two categories, namely:
-
Internal Cause and
-
External Causes
Internal Causes:
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.
Depletion:
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.
External Causes:
Depreciation caused by some
external reasons is called external depreciation. The main external causes
are as follows:
Obsolescence:
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.
Efflux 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.
Accident:
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.
|
