Welcome to class!
In today’s class, we will be talking about the depreciation of fixed assets. Enjoy the class!
Depreciation of Fixed Assets
Welcome to today’s class. We will be learning about the meaning, causes and characteristics of Depreciation
By the end of this lesson, you should be able to;
- Define Depreciation
- Mention some fixed assets
- Justify the reason for depreciation
- Explain the causes of depreciation
- Enumerate the characteristics of depreciable assets
- Compare the nature of types of assets
It may be defined as the permanent and continuing diminution (or lessening) in the quality, quantity or value of an asset.
CAUSES OF DEPRECIATION
- Physical factors – Assets may depreciate as a result of physical factors like humidity (or dampness), heat, erosion, evaporation of liquids, rust, rot and decay etc.
- Wear and Tear – An asset may depreciate as a result of constant usage.
- Passage of Time – or Effluxion of Time; Assets like patents, copyrights, leaseholds etc. have a fixed period of legal life. They, therefore, depreciate as a result of the passage of time. The depreciation of these intangible assets is known as AMORTISATION
- Obsolescence – Assets may be rendered out of use as a result of new technology or invention or change in fashion. The value of such obsolete assets (e.g. Black and White TV) will reduce drastically over a short period of time.
- Inadequacy or Superfluity – Assets may be out of use because of the increase in the output of a firm. In such a situation, assets will be replaced with new and bigger ones.
- Depletion – Some natural resources like gold, crude oil, iron ore deposits, quarries etc. reduce in value as they are being exploited or mined. These assets are known as WASTING ASSETS. The more they are extracted, the less the reserve that remains.
REASONS OR ADVANTAGES OF CHARGING DEPRECIATION
- Since it reduces net profit, the tax to be paid will be reduced
- The business will have a fund to replace the asset at the end of the useful life
- The value of the assets will not be overstated in the Balance Sheet
- Rather than charging the cost of an asset to the profits in the year of purchase, the cost of an asset is spread over its useful life – this is a demonstration of the matching concept in accounting.
- To ascertain the profit or loss on the disposal of assets.
FACTORS TO BE CONSIDERED IN THE COMPUTATION OF DEPRECIATION
- The historical (or original) cost of the asset
- The estimated useful life of the asset
- The estimated scrap value (or salvage) value of the asset
- The method of depreciation to be used e.g. straight line, reducing balance, revaluation method etc.
- The internal causes of depreciation
- The external causes of depreciation.
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