External Causes of Depreciation

External Causes of Depreciation

Depreciation is the measure of wearing out of a fixed asset. All fixed assets are expected to be less efficient as time goes on and as they are continuously used in a business, for example.

The causes of depreciation may be internal or external. The internal causes happen from operation of any cause natural to or inherent in the asset itself. External causes arise from the operation of forces outside the business.

External Causes

Obsolescence: The old asset will become obsolete (useless) due to new inventions, improved techniques and technological advancement. For example, old machine becomes obsolete with the invention of more economical and sophisticated machine whose productive capacity is usually larger and cost of production is therefore less. In order to survive in the competitive market the manufacturers must install new machines replacing the old ones. Again, it may occur that the articles produced by old machine are no longer saleable in the market on account of change of habit and taste of the people.

Effluxion of time: When assets are exposed to forces of nature, like weather, wind, rain, etc., the value of such assets may decrease even if they are not put into any use. Some assets diminish in value on account of sheer passage of time, even though they are not used e.g., leasehold property, patent right, copyright etc.

Time Factor: Lease, copy-right, patents are acquired for a fixed period of time. On the expiry of the fixed period of time, the assets cease to exist. Assets may be destroyed by abnormal reasons such as fire, earth quake, flood etc. In such a case the destroyed asset may be written-off as loss and a new one purchased.

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