Physical obsolescence

Definition

Physical obsolescence refers to the reduction in an asset's value due to physical wear and tear over time. This type of depreciation affects long-term tangible assets like buildings and machinery.

5 Must Know Facts For Your Next Test

1. Physical obsolescence is a key factor when calculating depreciation expense for long-term assets.
2. It differs from functional and economic obsolescence, which relate to usability and market conditions respectively.
3. Accounting for physical obsolescence ensures that financial statements reflect the current value of an asset accurately.
4. Regular maintenance can slow down but not completely prevent physical obsolescence.
5. Physical obsolescence must be considered when determining the useful life of an asset for depreciation purposes.

Review Questions

Related terms

Depreciation:

The systematic allocation of the cost of a tangible fixed asset over its useful life.

Functional Obsolescence: A reduction in an asset's usefulness or desirability because of an outdated design feature.

Economic Obsolescence: A loss in value caused by external factors such as changes in market conditions or regulations.