Depreciation
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A definition in your own words of depreciation
Depreciation is a non-cash expense that reduces the value of an asset over time
as a result of wear and tear, age, or obsolescence. Most assets lose their value over time, and must be replaced once the end of their useful life is reached. There are several accounting methods that are used in order to write off an assets depreciation cost over the period of its useful life. Because it is a non-cash expense, depreciation lowers the companys reported earnings while increasing free cash flow.
List the four reasons for depreciating an asset
Decline in the productive or service ability of a capital asset due to the effects of environment and wear and tear.
Physical Deterioration: It is caused mainly from wear and tear when the asset is in use and from erosion, rust, rot, and decay from being exposed to wind, rain, sun and other elements of nature.
When you use items, even under the best conditions, they begin to accumulate wear and tear.
Economic Factors: The problem on Obsolescence and Inadequacy. Obsolescence means the process of becoming obsolete or out dated. An old machinery though in good physical condition may be rendered obsolete by the introduction of new model which produces more than the old machinery. Inadequacy refers to the end of the use of an asset because of growth and changes in the size of the firm. But obsolescence and inadequacy do not mean that the asset is scrapped.
Time Factors: There are certain assets with a fixed point of legal life such as lease, patents, and copyrights. You can not use these assets which exceed the legal life .Even though they are not used