Tuesday 31 March 2015
What is depreciation? What are the causes of depreciation? Is it a cost? Why?
Depreciation is a permanent, gradual and
continuous reduction in the book value of the fixed asset. Except Land all the
fixed assets e.g. Car, Machinery, Furniture etc depreciates in value making the
asset useless after the end of a certain period.
Following are the causes
of Depreciation:
-Wear and Tear due to
regular use of the asset
-Deterioration occurs
with the passage of time, whether the asset is in use or not
-Damages done to the
assets due to an accident like fire, mishandling etc.
-Depletion of Asset
-Obsolescence i.e. due
to new technology in use, new inventions, innovations etc.
Yes, depreciation is a
cost. It is a historical cost, which is charged against profits of the
organisation reducing the profitability. It is a non-cash cost as it is never
paid or incurred in cash.
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