what is depreciation why is arrangement for depreciation is necessary
Answers
Explanation:
When an accountant prepares the accounts of a firm and jots down the amount of depreciation, he brings down the potential gains of the firm. The amount of depreciation is an expense for an entity. Thus, it is imperative to make the correct and accurate calculations. Let us understand what is depreciation and why we need to provide for it.
Depreciation needs to be provided because an asset is bound to undergo wear and tear over a period of time. This reduces the working capacity and effectiveness of the asset. Hence, this should reflect the value of the asset, at which it is carried in the books of accounts.
Also, every asset becomes obsolete over a period of time, as new technology and innovation take over. The value of the asset will hence decrease over time and this must be accounted for.
THE MONETARY VALUE OF AN ASSENT DECREASE OVERTIME DUE TO USE IS CALLED DEPRECIATION.
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