Causes of Deprecation
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.
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.
Objectives of Providing Depreciation