Assets (like furniture, building, electronic equipment, vehicles, etc.) play a very important role in running any business as they help in various functions like the work of the business, earning income, etc. But their value keeps on decreasing with the passage of time which is known as depreciation, and it starts from the time of construction of the asset and continues till the expected life of the asset is over.
The value of an asset may depreciate due to several reasons such as time, wear and tear, changes in technology, inadequacy, etc. Note: Book value and actual value of assets may differ, as in book, depreciation is charged at a fixed ratio (prescribed ratio), and in actual, depreciation is charged based on time, usage, technology, wear and tear etc.
Note: Depreciation applies only to tangible fixed assets, but not to land.
Table of Contents
Causes of Depreciation
Following are the causes of depreciation:
1. Time:
We can try to stop almost everything but not time because time is a continuous nature so as time passes the value of the asset also decreases that is why time is the main reason for depreciation. The time of an asset starts from its manufacturing but in the accounting book, it starts from the time of purchase.
2. Use:
After time, the use of an asset is the main reason for depreciation, because the more an asset is used, the faster it depreciates. In other words, as an asset is used, its capacity, performance, etc. start decreasing, which also leads to a decrease in production.
For example, a machine can make up to 1 lakh pens in its entire life, in this case, if 1 thousand pens are made in a month, then the machine will last for 100 months and if 2 thousand pens are made in a month, then it will last for 50 months.
3. Technology:
Nowadays technology is changing rapidly, due to which the depreciation of assets is also happening rapidly because due to change in technology, there is a change in the performance, usage, capacity, etc. of the asset, due to which there is a change in production/output as well.
For example, earlier a machine made 10 pens in a minute but now due to change in technology, the new machine is making 20 pens in a minute, then, in this case, the price of the old machine will decrease due to technology.
4. Wear and Tear:
Wear and tear affect any asset the most because the more wear and tear, the lesser will be the asset’s life, efficiency, performance, etc.
5. Inadequacy:
Due to changing technology, growing trade and the economy, old fixed assets are becoming inadequate, hence inadequacy is also one of the main reasons for depreciation.
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QNA/FAQ
Q1. Why do assets get depreciated?
Ans: With the passage of time, due to the use of assets, changes in technology, wear and tear, etc., production capacity decreases, and the cost of production increases, which leads to the depreciation of assets.
Q2. How does use reduce the value of an asset?
Ans: Using an asset reduces its capacity, performance, etc., which also reduces its value.
Q3. Is time the cause of depreciation?
Ans: Yes, time is the cause of depreciation.
Q4. Why does the book value and actual value of an asset differ?
Ans: The book value and actual value of an asset differ because in the book, depreciation is charged at a fixed ratio (prescribed ratio) whereas in actual, depreciation is charged on the basis of time, usage, technology, wear and tear, etc.
Q5. Write the reasons for depreciation.
Ans: Following are the causes of depreciation:
1. Time
2. Use
3. Technology
4. Wear and tear
5. Inadequacy
