Solution:Depreciation due to Physical Conditions:
Very often, loss in value of assets occurs due to wear and tear and continuous use of an item. Also, forces of nature, such as exposure to climatic conditions leads to loss in value of items. These are typically called depreciation due to physical conditions, which can be subdivided into following four types:1. Depreciation due to wear and tear from operating the machines: Friction present between sliding or rotating parts of an operating machine results into wear and tear. These can be reduced to minimum by proper lubrication of moving parts of a machine.
2. Negligent maintenance: This refers to loss of value of assets due to deferred maintenance. Maintenance of machines on a periodic basis reduces depreciation.
3. Damage of equipment due to rust, heat or decay: Equipments are continuously exposed to climatic and atmospheric effects that slowly reduces their strength and serviceability. This is called depreciation due to physical decay.
4. Depreciation due to accidents: The loss in value of assets resulting from undesirable. uncontrollable and unforeseen accidents is known as depreciation due to accident.
Depreciation Due to Functional Conditions: These are also referred to as depreciation due to economic factors. They can be subdivided into two types, viz., (i) inadequacy and
(ii) obsolescence.
1. Inadequacy: With dynamic changes occurring in business scenario and an increase in scales of business operations, an existing machine/equipment may become inadequate to manufacture/service products in required qualities and quantities. This is known as depreciation due to inadequacy.
2. Obsolescence: In the recent years, technological changes are occurring on an exponential scale. Arrival of new machines/equipment with additional features may make an existing machine obsolete, although it is functioning well. This situation may force replacement of an existing machine with a new machine containing advanced features. This is known as depreciation due to obsolescence.