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Saturday, May 1, 2010

Causes of Depreciation

  1. Wears and Tears: The value of an asset declines due to its constant use in the business. Generally, fixed assets are depreciated due to wear and tears which means reduction in the efficiency and value of an asset caused from vibration, friction, accident, movement, erosion etc.
  2. Innovation: Due to the development of science and technology, the new and improved automatic machines may be invented. Such invention reduces in the value of old and existing machinery.
  3. Expiry of Time: The value of some assets like patent right, copy-right, lease hold property etc. decrease with the passage of time. The right of such assets is predetermined for certain duration. After its expiry, there is no value even it is not used.
  4. Exhaustion: The value of some assets like mines and quarries go on declining with the continuous use.
  5. Fall in market price: Another reason of depreciation is permanent fall in the price of an asset. The value of asset reduces as the market price of an asset continuously goes on declining.

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