Depreciation and Causes of Depreciation

What do you mean by Depreciation?

Depreciation is a permanent, continuing and gradual shrinkage in the book value of a fixed asset. It is the fall in the quality or value of a fixed asset through physical wear and tear due to passage of time. It is a charge against profit for a particular accounting period. Depreciation is only calculated in respect of fixed assets such as plant, machinery etc. The exact amount can not be calculated for the depreciation whereas it can be estimated. Total depreciation can not exceed its depreciable value.

Causes of Depreciation

Physical wear and tear resulting from use:  It is the cause of charging depreciation for the assets which lose their value from the constant use such as fixed assets such as building; plant, machinery etc. get worn out and torn out due to the regular use.

Disuse: When a machine kept idle then it becomes less useful due to the passage of time.

Accidents: The value of assets goes down when it meet with accidents.

Obsolescence: When the demand of any good is decreased due to the change in technology or from any other reason then the value of assets which produced these goods is also fall.

Depletion: It is the cause of charging depreciation for the wasting asset such as mines and quarries which loses its value due to exhaustion from the continuous extraction.

The Objectives of Providing Depreciation

  • To ascertain the proper cost of assets.
  • To present true financial position the business.
  • To ascertain the correct profits.
  • To make provisions for the replacement of assets
  • To take the maximum tax benefit
  • To meet the legal requirement.