What are the causes of depreciation?
The main causes of depreciation are:
1. Wear and Tear due to Use or Passage of Time: This refers to the deterioration and diminution in an asset's value arising from its use in business operations. An asset also deteriorates simply with the passage of time, even when not in use, especially when exposed to natural elements like weather, winds, and rains.
2. Expiration of Legal Rights: Certain assets like patents, copyrights, and leases lose their value when the agreement governing their use ends after a pre-determined period. Their utility is extinguished immediately upon removal of legal backing.
3. Obsolescence: This occurs when an existing asset becomes out-of-date due to the availability of better assets. It arises from technological changes, improvements in production methods, change in market demand, or legal factors.
4. Abnormal Factors: Accidents due to fire, earthquake, or floods can cause permanent decline in an asset's usefulness, even though such loss is not continuing or gradual.
Explanation
This answer is based on NCERT Accountancy textbook Chapter 7 (Depreciation, Provisions and Reserves), specifically sections 7.3.1 to 7.3.4. The textbook clearly outlines these four causes as per Accounting Standard 6. For a 3-mark question, students should mention all four causes with brief explanations. Wear and tear covers both physical use and natural deterioration. Expiration of legal rights specifically applies to intangible assets with limited validity. Obsolescence is a non-physical cause related to technological and market changes. Abnormal factors refer to unexpected events like accidents.
Solution Steps
Step 1: Identify the four main causes from the textbook context
Step 2: Write brief explanation for each cause with relevant examples
Step 3: Format with proper paragraph breaks and bold key terms for exam presentation