Depreciation is an allocation of the cost of an asset over its useful life and is not a valuation process of the asset. Causes of Depreciation are discussed below
Causes of Depreciation
Given below are the various causes of depreciation.
Continuous Use: The continuous use of the fixed assets in the business operations leads to a reduction in their value due to natural factors such as sunlight, rain, gas, etc. Therefore, it can be said that depreciation occurs due to the normal wear and tear and constant use of the fixed assets in the business.
Expiry of Useful Life: All the fixed assets (except land) has only some specific life for which they are useful in the business. With the passage of time, there is always a fall in the value of fixed assets irrespective of the fact whether they are used or not. This fall in the value can be due to natural forces such as rain, weather, etc.
Obsolescence: Due to the fast technological innovations and inventions, the existing assets may get outdated. In such cases, the old assets are needed to be replaced by new technologically sophisticated assets. This leads to the obsolescence of fixed assets which need to be replaced even if their useful life has not expired.
Expiration 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 building is acquired at a cost of Rs 1,00,000 for 10 years on the lease, then each year its value depreciates by 1/10th of its gross value and at the end of the 10th year, the value of the building will be zero in the books.
Accidents: An asset may lose its value or get damaged due to some mishaps such as fire, accident, theft, or a natural calamity. Loss due to an accident is permanent in nature, in the sense, that such assets cannot be used further in the business as they have been permanently destroyed by the accident.
Permanent Reduction in the Market Value: Generally, the fluctuations in the market price of the fixed assets are not recorded in the Books of accounts. However, if the fall in market price is permanent, then it is recorded in the books because it leads to a fall in the value of fixed assets.
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