Question

Question : Explain the concept of depreciation. What is the need for changing depreciation and what are the causes of depreciation?

Answer 1

Answer : Concept of Depreciation : In simple words, Depreciation is a gradual reduction in the value of assets. In this way, depreciation may be defined as the permanent continuous diminution in the quality, quantity or value of assets.
According to Institute of Cost and Management accounting, London (ICMA) Terminology.. " The depreciation is the diminution in intrinsic value of the asset due to use and / or lapse time.
Need for changing Depreciation : In accounting, depreciation is needed because of conceptual, legal and practical business consideration. More over it is needed.
(i) To allocate depreciable cost
(ii) To ascertain true and fair profit or loss
(iii) To reveal true and fair financial position
(iv) To provide funds for replacement
Causes of Depreciation : There are generally two main causes of depreciation first is normal case such as normal wear and tear due to usage or passage of time, expiration of legal right in case of some assets and obsolescence due to technological advancement and second are abnormal causes such as accidents due to fire, earthquake, floods etc.