Depreciation is the reduction value in the carrying amount of a fixed asset. Depreciation reflects the actual consumption of the underlying asset so that the carrying amount of the asset has been reduced to its salvage value by the time its useful life is over. Depreciation is charged in the profit and & loss of the organization for the same period to provide the reasonable cost of the asset which has been used during that period.

In this article you will know about the causes of depreciation. You can also check out Capital Claims – Diminishing Value Depreciation Calculator.

Due to Wear and Tear During Usage of Assets:

It is the foremost reason for the depreciation of assets. By the continuing usage of the asset, most of the assets are worn off or get deteriorated. Like plants and machinery used for the production of goods, automobiles, construction, and many more. The continuous usage and running of machinery, the working or production capacity of the machinery decreases over the period of time & the value of the machinery also decreases in the market. So it’s important to know the financial position of the entity, it is necessary to reduce the proportionate value of the machinery in the books.

Technological Advancement of Supplementary Assets in Market:

If a new and upgraded version of machinery comes on the market, the value of machinery’s own by enterprise gradually decreases in the market, providing more benefits to the customer in comparison to the old obsolete version of the asset. In the financial accounts of your company, it’s important to show the value of the asset at a fair amount or reasonable amount.

Compliance of Accounting Standards Applicable to Entity:

It’s important for every enterprise to follow the provisions mentioned in accounting standards on the entity. It is covered under the matching concept; the depreciation is to be charged for the respective as the income through the asset has also been booked for the period mentioned above in the books of accounts.

The Absolute Need for Maintenance of Fixed Assets for Proper Productivity of Asset:

In the manufacturing companies, plants and machinery need regular maintenance over some time for full-time productivity to be received from the usage of such machinery. Some of the important parts of the machinery need to be replaced with new and upgraded parts. For this, it’s important to charge depreciation so that the parts that are to be replaced in the future are appropriately accounted for and written off during the period of its life.

Accident:

Plant break down, loss by fire, loss by theft, etc., are other contributing factors to depreciation.

Inadequacy:

This term refers to the termination of the use of an asset because of growth and changes in the size of the firm. Some of the time there could be a necessity of putting the assets out of use despite the fact that the asset is in good physical condition and this is because of inadequacy. For the fulfillment of the need of enterprise, the asset may not be adequate and another firm of small size may buy it.