Causes of Depreciation

A fixed asset can lose value for several distinct reasons, and a student is expected to be able to list and briefly explain each.

1. Wear and tear. The most common cause. Continuous use of an asset — a machine running in a factory, a vehicle on the road, furniture in daily use — causes physical deterioration, reducing its efficiency and value over time.

2. Efflux (passage) of time. Certain assets — most notably a lease or a patent — lose value simply because time passes, whether or not they are actively used. A 10-year lease is worth less after 6 years have gone by, used or not.

3. Obsolescence. An asset can become out of date because of new inventions, improved technology, or a change in fashion or taste, even though it is still in perfectly good working condition. A computer or a machine may be discarded not because it is worn out, but because a far more efficient model has replaced it.

4. Depletion. Applies to wasting assets such as mines, quarries and oil wells, whose value falls in direct proportion to the quantity of the mineral or resource extracted from them. The more that is dug out, the less remains, and the less the asset is worth.

5. Accidents. A fire, an earthquake, or any accident can suddenly reduce or destroy the value of an asset. …