- 2076 Shrawan · 2+2 marks
Define depreciation and its causes
Short answer
Depreciation is the systematic allocation of an asset’s cost less salvage over its useful life, reflecting decrease in value with time and use. Causes include physical wear, functional obsolescence, inadequacy, depletion, legal limits, market price changes, and accidental damage.
Define depreciation. Explain its causes.
Depreciation
Depreciation is the decrease in the value of a physical asset with the passage of time and use. In accounting and tax it is the systematic allocation of the cost of an asset (less its salvage value) over its useful life. It is a non-cash expense, but it is deductible from taxable income.
Causes of depreciation
- Physical deterioration (wear and tear): use, friction, corrosion, weather and ageing reduce the strength and efficiency of the asset.
- Functional obsolescence: new technology or new designs make the old asset out of date, even though it is physically sound.
- Inadequacy: the asset can no longer meet the growth in demand or capacity.
- Changes in requirement or law: a change in the product, safety rules or environmental standards makes the asset unsuitable.
- Depletion: the asset is a natural resource (mine, quarry) that is used up as material is extracted.
- Fall in market price: a decline in the market value of the asset because of changes in the economy or demand.
- Time (lapse of legal right): a fixed term of use, such as a lease, patent, license or concession, ends.
- Accident or damage: fire, flood, earthquake or accidents shorten the life.
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