Physical Depreciation VS Functional Depreciation

All plant/fixed assets, except land, depreciated. Factors that contribute to depreciation are physical and functional. Physical depreciation arises from the actual use of a plant asset. Functional depreciation is due to obsolescence factors such as technological advances and less demand for a product.

The purpose of recording depreciation is to show the decline of usefulness of an asset, not a decline in its market value. Depreciation merely reduces the value of plant asset accounts; it does not reduce the cash account or affect cash flows.