In actual reality also the residual cost rarely, or almost never, is equal to the value of the asset in the market. This aspect can be understood by considering the example of the building. The accountant will continue to allocate the cost every year and at some point the residual cost will either become zero or very near to zero, depending upon the method of calculating depreciation, but if the company decided to sell the building the amount it would receive will be as per the market demand for that building. We should now see the two basic causes of depreciation and then proceed to the methods of calculating it. The two causes are physical deterioration and obsolescence.
Physical deterioration occurs from use and exposure to atmosphere.
This is simple to understand. A car used for a year is definitely not the same as it was when bought. Similarly a machine after some use is not the same as it was when new. Some wear and tear is inevitable. A time will thus come when after some years the car or the machine ceases to give any useful output.