Depreciation of fixed assets of the enterprise: concept and types

Under the asset companies understand, first of all, the facilities and equipment used for production. Fixed assets should be replaced as they wear and tear.

The concept of depreciation of fixed assets of the enterprise

Fixed assets include tangible resources of the enterprise, which are not consumed in one production cycle. Fixed assets the company used the years and gradually wear down, which is understood as the gradual loss of their values.

Depreciation of fixed assets is the decrease in their cost. This is due to the gradual destruction of equipment in the production process or of obsolescence. Depreciation of fixed assets accounting reflects, together with the depreciation each month.

The types of depreciation of fixed assets

There are two types of depreciation of fixed assets – physical and moral. Physical deterioration represents the loss of equipment and facilities consumer qualities. There are physical wear of the first and second kind. In the first case the wear of the means of production is the result of their operation. The degree of such wear depends on the intensity of use of capital resources and increases output growth.

Physical depreciation of fixed assets of the second kind is the destruction of idle means of production under the influence of climate or due to incorrect operation and poor maintenance. If the first kind of physical wear is economically justified and unavoidable, the second type is an example of inefficient use of resources.

The decrease in the value of fixed assets need not be associated with the loss of their consumer qualities. In this case, it uses the concept of obsolescence. There are two forms. The increase in the efficiency of production of capital goods is the reason for obsolescence of fixed assets of the first kind. It is caused by the appearance of cheaper tools. Moral deterioration of the second kind arises from the improvement of the means of production, which become more efficient and reliable. For this reason, the value of the old equipment is reduced.

Both forms of obsolescence assets arise as a consequence of technical progress. From the point of view of Economics, they are quite justified, since outdated means of production are replaced by more perfect. However, enterprise-specific moral deterioration of assets means a significant increase in the costs of production.