What is Depreciation?

Depreciation is defined as the loss in value of an asset with the passage of time. A reserve fund should be created to realize the asset’s cost at the end of its life and must not be confused with the profit. The main purpose of the depreciation is to provide for the recovery of capital that has been involved in the possession of the physical property.

Types Of Depreciations

  1. Physical Depreciations
  2. Functional Depreciations
  3. Physical Depreciations

Physical Depreciation

Depreciation resulting in the physical impairment of an asset is known as physical depreciation. This results in lowering the ability of the asset to render its intended service. The primary cause of physical depreciations is wear and tear because of its constant use such as deterioration due to the action of elements such as corrosion of pipe, and chemical decomposition.

Functional Depreciation

Functional depreciation often called OBSOLESCENCE is defined as the loss in the value of the property due to a change in fashion, design or structure or due to inadequacy to meet the growing demand, the necessity of replacement due to the new invention being more economical and more efficient etc.

Contingent Depreciations

  1. accidents (due to negligence)
  2. disease (population of water, parasites)
  3. diminution of supply (natural gas, electricity water etc.


Difference Between Depreciations and Obsolescence


(1) This is the physical loss in the value of property due to wear and tear and decay etc.

(ii) It depends upon its original condition, quality of maintenance and mode of use.

(ii) It varies with age.

(IV) There are several methods for calculating the amount of depreciation.



(1) This is the functional loss in the value of the property due to changes in design, structure, fashion, utility, demand etc.

(ii) It depends upon technological advancement, art etc

(iii) Not dependent on age.

(iv) No method is available for the calculation of obsolescence.


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