Question

what are the objectives of providing deprecation​

Answer 1

Explanation:

(c) To create funds for replacement of assets:

Hence, the amount of depreciation charged to Profit and Loss account remains in the business and the amount thus accumulated during the working life of the asset provides funds for its replacement at the end of the working life of the asset

Answer 2

ANSWER :

The main objectives of providing depreciation on fixed assets are as follows :-

• [1] 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. In case of the assets of a business, unless the depreciation is charged against revenue, true profit or loss of a business cannot be ascertained.

• [2] To ascertain the accurate cost of production : As depreciation is also an item of expenses, the correct cost of production cannot be calculated unless it is also taken into account. The determination of sale price is done on the basis of cost of production and hence, if the depreciation is not included in cost of production, the sale price will be fixed at a lower rate and this will lead to reduced profit.

• [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 alount which is in excess of their true value. Therefore, in order to present the true as well as 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 the 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 to provide fund for the replacement of fixed assets after the expiry of their estimated useful life of those assets.

MORE TO KNOW :

The term "Depreciation" represents loss or diminution or decrease or decline in the value of fixed asset. The word "Depreciation" has been derived from the Latin word "Depretum". 'De' means 'decline' and 'pretum' means 'price'. Hence, "Depreciation" mean "decline in price".

Therefore, in accounting, depreciation is the process of allocating the net cost of fixed assets over ots estimated useful life.

• According to R.N. Carter, "Depreciation is the gradual and permanent decrease in the value of an asset from any cause".