What Is the Least Significant Type of Depreciation?

Of the four main sources of depreciation, the least significant depends on the asset.

Depreciation is the decline in an asset's value. It is an indiscriminate catch-all term that includes all possible sources that cause a decline in the asset's value. In accounting, depreciation is the procedure performed to represent these declines in an asset's value as it is used in business activities. Not all sources of depreciation are applicable to all assets, and as a result, it is difficult to determine which sources are either the most or least significant on a universal scale.

Depreciation

Depreciation is performed to recognize on the accounts that the asset in question is losing value because of its usage in business activities. It is performed because the matching principle in accounting requires that costs be recorded in the same time period as the benefits that their occurrence helped produce. Depreciation tends to be estimated using mathematical formulas for ease and convenience.

Sources of Depreciation

All phenomenon that cause declines in an asset's value are included in the catch-all term that is depreciation. But the four main sources of depreciation are simple wear and tear, obsolescence, depletion, and expiration. Other sources of depreciation exist but are so insignificant in comparison as to be negligible. All sources of depreciation are included as one expense on the accounts.

Obsolescence and Wear and Tear

Obsolescence is the decline in value that an asset experiences due to decreasing demand as a result of newer, better models or substitutes being made available on the market. It is not a major source of depreciation for most assets in comparison to other sources because not all assets are easily substituted and most advances are minor. In contrast, wear and tear is perhaps the single most significant source of depreciation because it includes all minor damage to the asset that impedes its intended function, from rusting metal to chipped paint.

Depletion and Expiration

Depletion is the exhaustion of an asset's capability to produce units of economic worth in the form of manufactured goods or natural resources such as oil and metals. It is applicable only to certain assets such as oil wells and mineral mines but is a major source of depreciation for those assets. Besides obsolescence, expiration is the other contender amongst the main four for the least significant. It is applied to a few rare assets that have legally mandated lifespans and depreciation due to expiration occurring as time runs out on that lifespan.

References

• IAS Plus: IAS 16, Property, Plant, and Equipment
• Accounting For Management: Causes of Depreciation