What are the causes of depreciation?

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Depreciation is caused by one or more of the following factors:-

Wear and tear: Assets get worn or torn out on account of constant use as is the case with plant and machinery or Furniture.”Wear and tear” signifies the shrinkage of value arising from use.

Exhaustion or Depletion : An asset may get exhausted through constant working,.For example, a mine or an oil well gets exhausted through continuous extraction of minerals or oil.

Accidents: When an asset meets with any accident it may get depreciated in value.

Efflux of time: Even when an asset is not in actual use it loses value according to age or due to efflux of time or when time passes. This is true of assets like leasehold properties, patents and copy rights.

Obsolescence: Some assets are discarded before they are worn out.This happens when an asset becomes old fashioned or obsolescent on account of later inventions.For example,hand machines are replaced by power machines for better efficiency.When the old one is discarded the business incurs a loss. Obsolescence loss is also called depreciation.

Of these,Wear and tear,exhaustion or depletion, and accident may be described as internal causes of depreciation while efflux of time and obsolescence may be called external causes.

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