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CA Foundation · Accounting · Depreciation and Amortisation

Which of the following is a factor that causes depreciation of a fixed asset, as recognised in Accounting Standards?

Wear and tear from use and passage of time is a recognised cause of depreciation. Temporary market price swings, owner's drawings and profit fluctuations do not reduce the asset's useful life or its depreciable amount, so they are not causes of depreciation.

  1. AFall in the market price of the asset due to temporary market fluctuations
  2. BWear and tear arising from use of the asset and passage of timeCorrect
  3. CIncrease in the owner's drawings during the year
  4. DFluctuation in the profit earned by the business

Explanation

Depreciation arises from factors such as use, wear and tear, passage of time, obsolescence and expiry of legal rights. Temporary market price changes, drawings and profit levels do not cause depreciation of the asset's depreciable amount.

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