---
title: "Define depreciation and its causes"
subject: "Engineering Economics"
chapter: 7
key: "semester_6/engineering_economics:depreciation-define-causes"
source: https://www.bctengineer.com/q/semester_6/engineering_economics/depreciation-define-causes
site: BCT Engineering
---

# Define depreciation and its causes

Engineering Economics · Chapter 7: Depreciation and Corporate Income Taxes

- Asked in: 2076 Shrawan, 2+2 marks
- Video: [Depreciation | Its causes and types of depreciation](https://www.youtube.com/watch?v=3Iuq_8A_KAU) — OPengineer
- Answer checked by Claude Opus 5.5 (high effort) on 2026-10-14
- Page: https://www.bctengineer.com/q/semester_6/engineering_economics/depreciation-define-causes
- Whole chapter: https://www.bctengineer.com/md/semester_6/engineering_economics/chapter-7

## Question

Define depreciation. Explain 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.

## Answer

#### 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
1. **Physical deterioration (wear and tear):** use, friction, corrosion, weather and ageing reduce the strength and efficiency of the asset.
2. **Functional obsolescence:** new technology or new designs make the old asset out of date, even though it is physically sound.
3. **Inadequacy:** the asset can no longer meet the growth in demand or capacity.
4. **Changes in requirement or law:** a change in the product, safety rules or environmental standards makes the asset unsuitable.
5. **Depletion:** the asset is a natural resource (mine, quarry) that is used up as material is extracted.
6. **Fall in market price:** a decline in the market value of the asset because of changes in the economy or demand.
7. **Time (lapse of legal right):** a fixed term of use, such as a lease, patent, license or concession, ends.
8. **Accident or damage:** fire, flood, earthquake or accidents shorten the life.

## Check yourself

The answer's key points as multiple-choice questions, with the correct option and why.

1. What is depreciation?
   A. Decrease in value of an asset with time and use, allocated over its life as a non-cash, tax-deductible expense
   B. A cash payment to replace the asset
   C. An increase in market value
   D. The salvage value of an asset
   Answer: A. It spreads cost less salvage over the useful life and reduces taxable income. (Key point: Definition)

2. What is functional obsolescence?
   A. Wear and tear from use
   B. An asset is out of date due to new technology even though it is physically sound
   C. Exhaustion of a mine
   D. Expiry of a lease
   Answer: B. Newer designs make the old asset obsolete. (Key point: Functional obsolescence)

3. Which cause applies to mines and quarries?
   A. Inadequacy
   B. Physical deterioration
   C. Depletion
   D. Time lapse
   Answer: C. Natural resources are used up as material is extracted. (Key point: Depletion)

4. What is inadequacy?
   A. Fire damage
   B. Fall in market price
   C. A change in law
   D. The asset can no longer meet growth in demand or capacity
   Answer: D. The asset is too small for the new demand level. (Key point: Inadequacy)

## Related in Engineering Economics

- [Depreciation, causes, methods; DB schedule for 60,000](https://www.bctengineer.com/question.md?key=semester_6%2Fengineering_economics%3Adepreciation-causes-methods-60000-db) — Engineering Economics, chapter 7, asked 2×
- [Depreciation, causes; declining balance for 50,000](https://www.bctengineer.com/question.md?key=semester_6%2Fengineering_economics%3Adepreciation-causes-db-50000) — Engineering Economics, chapter 7, asked 2×
- [Depreciation causes; SOYD and declining balance](https://www.bctengineer.com/question.md?key=semester_6%2Fengineering_economics%3Adepreciation-causes-soyd-declining-150000) — Engineering Economics, chapter 7