Definition of depreciation, facts and causes.

The word 'Depreciation' has been derived from the Latin word 'Depretium' which means 'decline in price' or 'value'. Depreciation relates to fixed assets which loose value on account of usage. Therefore 'Depreciation' means decline in value of fixed assets on account of usage.

Definitions:

Depreciation may be defined as the permanent and continuing diminution in the quality, quantity or the value of an asset.William Pickles

Depreciation in the shrinkage in the value of an asset at a given date as compared with its value at a previous date.J.H. Burton

Facts about depreciation;

1.Depreciation is part of the operating cost

2.It is a reduction in the value of an asset

3.The decrease in the value of an asset is due to its use, caused by wear and tear or any other reason

4. The decrease in the value of an asset is gradual and continuous.

SOMF Asset Patterns

English: Real estate economics - with depreciation

English: A graph of the depreciation of a 1993 Dod...

Causes of Depreciation:

1.Physical wear and tear

The most important fact that contributes to depreciation of an asset is the physical wear and tear resulting from its use. It reduces the future capacity of the asset to serve and its earning power. As a result, it reduces the value of an asset. A tangible asset physically deteriorates by wear and tear caused from vibration, friction, movement, strain, erosion etc.

2.Physical deterioration

In case of majority assets, the deterioration takes place with sheer passage of time. The assets are exposed to elemental forces of nature such as winds, weather etc.

3.Expiry of legal rights

Certain assets like patents, lease and licences, depreciate with the passage of time.

4.Fall in value due to demand fluctuations.

Sometimes, the demand for services provided by the assets may fluctuate which causes a fall in the value of...