Session 9 - Causes of Depreciation

Session Plan : Causes of Depreciation

1️⃣ 0–5 min: Introduce the concept of depreciation and link it to asset usage.
2️⃣ 5–15 min: Explain the meaning and need to study causes of depreciation.
3️⃣ 15–30 min: Discuss each cause with examples and visual aids.
4️⃣ 30–40 min: Group activity – identify real-life examples of depreciation causes.
5️⃣ 40–45 min: Recap key points and review 5 important questions.

Lecture Material : (PDF, PPT)

Learning Material (IV Quadrant Approach)

(Q1) : Text and Image based Content (PDF/Image Formats)

the various causes of depreciation, which refer to the reduction in the value of an asset over time due to factors such as usage, wear and tear, and obsolescence. Understanding these causes is crucial for accurate financial reporting and asset management.

Internal Causes of Depreciation

1. Wear and Tear: This is the most common cause of depreciation. Assets like machinery, vehicles, and equipment experience physical deterioration over time due to regular use, friction, and environmental factors. For instance, a vehicle's engine components may wear out, reducing its efficiency and value.

2. Depletion: This applies to natural resources such as mines, oil wells, and forests. As these resources are extracted or harvested, their value diminishes. For example, extracting oil from a well reduces the amount of available resource, leading to depletion.

3. Obsolescence: Technological advancements can render existing assets outdated. For example, the introduction of more efficient machinery can make older models less desirable, leading to a decrease in their value.

4. Passage of Time: Some assets lose value simply due to the passage of time, even if they are not in use. For example, a patent or copyright may lose value as it approaches expiration.

5. Accidents: Unexpected events such as fires, floods, or accidents can cause sudden and significant damage to assets, leading to immediate depreciation. For instance, a factory fire can destroy machinery, resulting in a total loss of value.

External Causes of Depreciation

1. Economic Factors: Changes in market conditions, inflation, or economic downturns can reduce the demand for certain assets, leading to a decrease in their value. For example, during a recession, the demand for luxury vehicles may decline, causing their market value to drop.

2. Legal and Regulatory Changes: New laws or regulations can impact the value of assets. For instance, stricter environmental regulations may render certain machinery non-compliant, reducing its value.

3. Environmental Factors: Exposure to harsh weather conditions, humidity, or other environmental factors can accelerate the deterioration of assets. For example, buildings in coastal areas may experience faster wear due to saltwater exposure.

Summary

Understanding the causes of depreciation is essential for businesses to manage their assets effectively, plan for replacements, and ensure accurate financial reporting. By recognizing these factors, companies can implement strategies to mitigate depreciation and extend the useful life of their assets.

(Q2) : Video Based Content (Youtube)

(Q3) : Formative Assessment (Google Form/Any Other Online Quiz Platform)