What is Depreciation in Construction?

What is Depreciation?

The term depreciation is derived from the Latin word depretiatum meaning the fall in value or becoming less in worth. Depreciation is defined as the loss in value of an asset with passage of time.

In general sense, it means getting consumed, decayed, damaged, obliterated or worn out. Boardly speaking it represents a loss caused by factors like decay, wear and tear, actions of elements of nature, insufficiency or inadequacy, obsolescence, damages in art and fashion, changes in demands etc.

Following are the three main causes responsible for depreciation as understood by the decrease in worth:

  1. Physical conditions
  2. Functional obsolescence
  3. Economic obsolescence

 1. Physical Conditions

Following are the physical conditions for such type of decrease in worth:

  • Due to general wear and tear
  • Elements of nature such as heat, cold and wind and
  • Due to structural deterioration .

 2. Functional Obsolescence

Functional obsolescence means the mode by which the purpose was to be fulfilled has gone out of use or out of date at a particular time.

The functional obsolescence is due to the causes within the structure or the asset itself. It is due to the following causes:

  • Inadequacy or over adequacy
  • Lacking in utility
  • Obsolete necessities
  • Outmoded design

  3. Economic Obsolescence

The physical and functional depreciations are because they are due to causes within the property or asset itself. The depreciations due to the economic obsolescence are external because they are due to external causes.

The economic obsolescence is due to the following causes:

  •  Changes in character and use
  •  Changes in laws
  •  Nearness to nuisances
  •  Over supply
  •  Social changes

Methods for Estimating Cost depreciation:

Following are the six methods adopted to calculated the cost depreciation of a property.

  • Straight Line method
  • Constant Percentage Method
  • Quantity Survey Method
  • Sinking Fund Method
  • Sum of the digit’s method
  • Unit cost method

 

 

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