(a) What is depreciation of an asset?
(b) List three causes of depreciation.
(c) Explain the following methods of depreciation:
(i) straight line;
(ii) reducing balance;
(iii) revaluation.
Explanation
(a) Depreciation represents how much of an asset's value has been used up. The monetary value of an asset reduces over time due to use, wear and tear or obsolescence of the asset depreciation is used to measure the value of the asset overtime.
(b) Causes of depreciation;
i. Wear and tear; Any asset will gradually break down over a certain usage period, as parts wear out and need to be replaced. Eventually, the asset can no longer be repaired, and must be disposed of.
ii. Perishability; Some assets have an extremely short life span. This condition is most applicable to inventory, rather than fixed assets.
iii. Inefficiency/obsolescence; Some equipment will be rendered obsolete by more efficient equipment, which reduces the usability of the original equipment.
(c)
