Causes of Deprecation | Objectives of Providing Depreciation

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Causes of Deprecation

The depreciation may broadly be divided into two:-

  • Internal causes
  • External causes.

1. Internal causes: Depreciation that is a result of certain inherent normal causes is known as internal depreciation. The causes of internal depreciation are:

Wear and Tear: The life of an asset reduces due to its continued use as for e.g. the life of building, plant, machinery, etc. such decline and the quantum depends of use of an asset and in the event of double- shift depreciation on plant and machinery will be doubled. It is very obvious that such loss is unavoidable. A time will come when the asset will become unfit for repairs, when it will no longer be suitable.

Depletion: Some assets decline in value proportionate to the quantum of production or use as for example mines, quarry, etc. As we extract coal, etc. from coal mine, the total deposit in the mine reduces gradually and after some time it will be fully exhausted. Then its value will be nil.

2. External: Whenever depreciation is caused by some external factors then it is called external depreciation.

Obsolescence: Some of the assets, though still new and still having their life left that too in proper condition can result in becoming obsolete. For example with the advent of new technology and modern machinery, an old machine can become obsolete unable to bear the brunt of invasion of new technologies. This is also possible because new and modern machinery bring in higher productivity, better quality and lower cost of production. Thus it becomes necessary to install new machinery in a competitive environment.

Passage of time: Certain assets which have not been used also lose their value in course of time, for example lease hold property, patent rights, copy rights, etc.

Accidents: Disasters such as floods, earthquakes cause major destruction of assets reducing its usage. In such cases the assets are described as loss and new asset can be purchased.

Objectives of Providing Depreciation

Following are the objectives of providing depreciation in any business:

1. In order to keep the owners capital intact the recovery of cost incurred on fixed assets is made over their useful life.

2. In the event of retirement of original assets the cope up with the replacement cost.

3. To determine the actual cost of production by considering depreciation as also one of the component of cost.

4. To determine the actual profit for the year.

5. To find out the actual financial position through balance sheet.

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