Question

estate 4 main reason of charging depreciation​

Answer 1

ANSWER :

❒ Four main reasons of charging depreciation on fixed assets are as follows :-

• [1] To ascertain the accurate cost of production : As depreciation is an item of expenses, the correct cost of production cannot be calculated unless it is taken into account.

• [2] To ascertain the true profit or loss : The true profit of a business can be ascertained only when all costs incurred for the purpose of earning revenue have been charged against revenue. Unless the depreciation charged against revenue, the true profit or loss of a business cannot be ascertained.

• [3] To show the true and fair view of the financial position : If the depreciation is not charged, the assets will be shown in the Balance Sheet at an amount which is in excess of their true values. Therefore, in order to present the true and fair view of the financial position of a business, it is important to provide for depreciation.

• [4] To provide funds for replacement of assets : Though depreciation is debited to Profit and Loss Account, it is not paid in cash like other expenses. Hence, the amount of cash equivalents of depreciation is retained in the business and is used tk provide fund for the replacements of fixed assets after the expiry of their estimated useful life.