Question - What is depreciation? What are the causes of depreciation? Is it a cost? Why?
Answer -
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.