Definition and reasons for depreciation 

Depreciation of assets is the loss in value of the assets. The reasons for it is due to  

• Usage
• Wear and Tear
• Obsolescence
• Legal Limits

Usage refers to depleting the resource that is available in the asset. By depleting the resource, the asset will have more depreciation. Think of a gold mine. The more you dig out of it, the lesser the gold there is in it. Logically, the value of the gold mine will drop. 

Wear and tear is easy to relate to depreciation. The more you use of the asset, the more wear off in terms of its parts. This will mean lesser value to the asset.

Obsolescence is the assets going outdated over time. Think of all the iphone versions introduced thus far. I am pretty sure that there will be no one who is interested in the iphone 3 by now as I write this blog.  Iphone 3 had been made obsolete by the newer versions that had been introduced. There is no more value in having iphone 3. 

Legal limits is applied when the law restricts the years of usage of an asset. For example, if the law states that a car can only be driven for 10 years, then the depreciation will be calculated based on 10 years. Since 10 years is the maximum you can use for the car, the legal system had imposed depreciation to the asset. 

Methods for depreciation 

The 2 methods of depreciation are straight line and reducing balance. 

Straight line method is

(Cost – Scrap value) * Percentage of Depreciation

And 

Reducing balance method is

(Cost – Accumulated Depreciation) * Percentage of Depreciation.

If you want to know the techniques to learn for learning Principles of Accounts (POA), read up Learning Principles of Accounts (POA) and Scoring As.