Causes of Depreciation

Depreciation is not a single event but the result of several distinct forces that act on an asset over time. Accounting Standard 6 (Depreciation Accounting) spells out these causes clearly. Understanding each cause is essential because it tells you why the asset’s value is falling — and that reason determines how you think about the loss, even if the journal entry (Debit Depreciation A/c, Credit Asset A/c) remains the same.

The causes fall into two broad categories: internal wear and tear from use, and external factors that make the asset less valuable regardless of how well it is maintained.

Wear and Tear is the most obvious cause. Every time a machine runs, a vehicle moves, or furniture is used, there is physical deterioration. This is inevitable and directly proportional to usage. A taxi depreciates faster than a private car because it is used more. This is the core reason depreciation is treated as an expense — it is the cost of consuming the asset’s useful life.

Passage of Time (Efflux of Time) causes depreciation even when an asset is not used at all. A leasehold property loses value every year simply because the lease period is shrinking. A patent or copyright has a fixed legal life. Time alone reduces the remaining future benefit, so depreciation must be charged even on idle assets.

Obsolescence is the loss of value due to newer, better technology or changing market demands. A computer bought two years ago may work perfectly but is now obsolete because faster models exist. A machine that produces a product no one wants is obsolete. This is an external cause — the asset hasn’t worn out, but it has lost its economic usefulness.

Expiration of Legal Rights applies to assets like patents, copyrights, trademarks, and leases. These have a fixed legal term. Once the right expires, the asset has zero value. Depreciation (often called amortisation for such intangible assets) must systematically write off the cost over that legal life.

Depletion is the cause specific to natural resources — mines, oil wells, quarries. As you extract coal or oil, the resource is physically consumed. The asset is literally being used up. The accounting term for this is depletion, but the principle is the same: the cost of the resource is allocated over the estimated quantity extracted.

Permanent Fall in Market Value (or a permanent diminution in value) can happen due to accidents, natural disasters, or a sudden change in market conditions. If a factory is damaged in a flood, the value of the building falls permanently. This is not the same as normal wear and tear — it is an extraordinary loss. However, if the fall is permanent, the asset must be written down to its recoverable amount, and the write-down is treated as depreciation for that period.

Summary of causes in the order they appear in the standard: