Question

What are the causes of depreciation?

Answer 1

1. Constant use− Due to constant use of the fixed assets there exists normal wear and tear that leads to fall in the value of fixed assets.

2. Expiry of time− With the passage of time, whether assets are used or not, its effective life decreases.

The natural forces like rain, weather, etc. lead to deterioration of the fixed assets.

3. Obsolescence− Due to the fast technological innovations and inventions today’s assets may be outdated by tomorrow’s sophisticated assets.

This leads to the obsolescence of fixed assets.

4. Expiry of legal rights− If an asset is acquired for a specific period of time, then, whether the asset is put to use or not, its value becomes zero at the end of its useful life.

For example, if a land is acquired for ₹ 1,00,000 for 25 years on lease, then each year its value depreciates by of its gross value.

At the end of the 25^th year, the value of the lease will be zero.

5. Accident− An asset may lose its value and damage may happen to it due to mishaps such as a fire accident, theft or a natural calamity.

The loss due to accident is permanent in nature.

6. Permanent fall in value− Generally, we do not record fluctuations in the market price of the fixed assets in the books.

However, if the fall in market price is permanent, it is accounted, which leads to a fall in the value of fixed assets in the books.