What Are the Causes of Depreciation?
Depreciate is the term used to describe how the cost of an item gets spread over the item's useful life on a company's books. Items such as buildings, machinery and computers are commonly depreciated items. Companies use depreciation to spread the cost of purchasing items out over their lifespan. For example, without depreciation, if a company spent $10,000 for new machinery that would last 10 years, the company would have a $10,000 expense the first year and no expenses for the machinery the next 9 years. With depreciation, the company can expense $1,000 of the machine each year to have a more accurate representation of expenses.
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Wear and Tear
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When you use items, even under the best conditions, they begin to accumulate wear and tear. This decreases the amount of time the item has left to be used. For example, if a car is expected to last for about 150,000 miles and the car is driven 20,000 miles in the first year, someone who would buy the car would only expect it to last another 130,000 miles. In addition, as items get more wear and tear, they are more likely to break down or need repairs. For example, the repairs needed for the first 20,000 miles of driving a car will usually be minimal and may even be covered by warranty, while the repairs for driving a car for miles 130,000 to 150,000 are likely to be much greater.
Outdated Technology
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As time passes, many technologies become outdated or obsolete, which reduces their value. This is particularly true in the electronics field, where computers, cell phones, cameras and televisions are rapidly being replaced with newer and better items. The impact of depreciation depends partly on whether the item can still be used with current technology. For example, an older computer model may not be the fastest, but if it can still run the most recent programs, the depreciation of the computer's value will be lower than if it cannot run programs that businesses need to run.
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Accountants
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When companies depreciate an item on their financial books, they generally use one of several depreciation methods that write off a certain amount of the item's value per year, regardless of the actual value of the item. For example, if an accountant uses a straight line depreciation method to depreciate a $20,000 car over 10 years, the car will be depreciated at $2,000 per year, regardless of whether the car is driven 5,000 miles or 25,000 miles in a given year. However, if the firm chooses to depreciate the car based on miles driven, the mileage would be taken into consideration when calculating depreciation.
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References
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