Concept of Depreciation

Every business acquires some non-trading fixed assets. These fixed assets are used in the business for
facilitating its trading activities and enhancing its revenue earning capacity. These assets are basically
purchased

for

the

business

with

the

intention

of

permanent

use

and

not

for

resale.

All fixed assets except the value of land decreases with the passage of time. The value of these assets
decrease each year. Such gradual reduction or decrease in the value of fixed assets for the purpose of
earning revenue is called depreciation. Depreciation is closely related with the determination of profit or
loss for the period. Unless depreciation is charged to the revenues, the true income of the business can
not

be

ascertained

properly.

As

such,

depreciation

is

revenue

expense.

Fixed assets are also called depreciable assets. The characteristics of depreciable assets are as follows.
*

The

expected
Those

life

of

the

assets

asset

is

have

more
a

than

one

limited

accounting
useful

period.
life.

* Those assets are held by the business for use in production of goods and services.
*

Those

assets

are

not

for

the

purpose

of

sale

in

the

ordinary

course

of

business.

The cost of fixed asset indicates 'the price for the future service of the assets'. It is necessary to spread its
cost over a number of years during which benefit of the asset is received. This process of allocating the
cost of fixed assets is termed as 'depreciation'.

Causes
1. Wear And Tear
wear and tear refers to a decline in the efficiency of asset due to its constant use. When an asset losses
its efficiency, its value goes down and depreciation arises. This is true in case of tangible assets like plant
and machinery, building, furniture, tools and equipment used in the factory.
2. Effusion of Time
The value of asset may decrease due to the passage of time even if it is not in use. There are some
intangible fixed assets like copyright, patent right, and lease hold premises which decrease its value as
time elapse.
3. Exhaustion
An asset may loss its value because of exhaustion too. This is the case with wasting assets such as
mines, quarries, oil-wells and forest-stand. On account of continuous extraction, a stage will come where
mines and oil-wells get completely exhausted.
4. Obsolescence
Changes in fashion are external factors which are responsible for throwing out of assets even if those are
in good condition. For example black and white televisions have become obsolete with the introduction of
color TVs, the users have discarded black and white TVs although they are in good condition. Such as
loss on account of new invention or changed fashions is termed as obsolescence.

5. Other Causes
Market value and accident of an asset are other causes of depreciation which decrease in the value of
assets.