The following are the advantages of providing depreciation:
1. Ascertainment Of True Profits
When an asset is purchased, it is nothing more than a payment in advance for for the use of asset. Depreciation is the cost of using a fixed asset. To determine true and correct amount of profit or loss, depreciation must be treated as revenue expenses and debited to profit and loss account.
2. Reporting Of True And Fair Financial Position Of A Business
The value of assets decrease over a period of time on account of various factors. In order to present a true state of affairs of the business, the assets should be shown in the balance sheet, at their true and fair values. If the depreciation is not provided then the asset will appear in the balance sheet at the original value. So, in order to show the true financial position of a business, depreciation is required to be charged on the assets.
3. Replacement Of Assets
Assets used in the business need to be replaced after the expiry of their useful life. Depreciation can be taken as a source of fund for replacing worn out asset by a new asset. Thus, depreciation charges help in accumulating funds for the replacement of an asset.
4. Saving In Taxes
The profit and loss account will show more profits if depreciation is not charged on asset. So, the business needs to pay more income tax to the government. Depreciation charges on assets save the amount of tax equivalent to tax rate. Since it is shown as expense in the profit and loss account, it reduces the amount of the profit.
1. Ascertainment Of True Profits
When an asset is purchased, it is nothing more than a payment in advance for for the use of asset. Depreciation is the cost of using a fixed asset. To determine true and correct amount of profit or loss, depreciation must be treated as revenue expenses and debited to profit and loss account.
2. Reporting Of True And Fair Financial Position Of A Business
The value of assets decrease over a period of time on account of various factors. In order to present a true state of affairs of the business, the assets should be shown in the balance sheet, at their true and fair values. If the depreciation is not provided then the asset will appear in the balance sheet at the original value. So, in order to show the true financial position of a business, depreciation is required to be charged on the assets.
3. Replacement Of Assets
Assets used in the business need to be replaced after the expiry of their useful life. Depreciation can be taken as a source of fund for replacing worn out asset by a new asset. Thus, depreciation charges help in accumulating funds for the replacement of an asset.
4. Saving In Taxes
The profit and loss account will show more profits if depreciation is not charged on asset. So, the business needs to pay more income tax to the government. Depreciation charges on assets save the amount of tax equivalent to tax rate. Since it is shown as expense in the profit and loss account, it reduces the amount of the profit.
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