Depreciation of Plant Assets
Depreciation is the systematic allocation of the cost of tangible plant assets over their useful lives. It reflects the decrease in an asset’s value due to use, aging, or other factors. Depreciation ensures that the cost of an asset is matched with the revenue it helps generate during its operational life.
Primary Causes of Depreciation
- Physical Deterioration
- Wear and Tear: Repeated use reduces the efficiency and functionality of an asset.
- Environmental Impact: Exposure to weather, humidity, and temperature changes can cause deterioration.
- Obsolescence
- Technological Advances: Newer technologies can make older assets less efficient or redundant.
- Market or Regulatory Changes: Changes in demand, laws, or standards may render an asset obsolete.
- Passage of Time
- Assets naturally lose value over time, even without active use, due to aging materials or components.
- Accidental Damage
- Events such as accidents, natural disasters, or improper use can shorten an asset’s useful life.
- Legal or Contractual Limits
- Certain assets have a predefined useful life as specified by contracts or legal obligations,
- such as patents or leased equipment.
