Question

What is the need for providing Depreciation??

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Answer 1

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Need to Provide Depreciation

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.

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Answer 2

ANSWER :

❒ The need for providing Depreciation are as follows :-

• ➬ 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.

• ➬ 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.

• ➬ 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.

• ➬ 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.

• ➬ To reduce income tax liability : Depreciation is an allowable expenditure under the income-tax law. If the depreciation is not charged, the net profit shown by Profit and Loss Account will exceed the actual profits and as a result the income-tax liability will be more than what it should have actually been. Hence, in order to reduce the payment of income-tax liability, it is necessary to provide depreciation.