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To show the true value of the fixed asset on a certain period. Though the effect on the purchase value of the asset will depend on the number of years you will assign for the depreciation. Either you follow the standards or follow the policy of the company.
Fixed assets are subject to normal wear and tear with the use and replacement at the end of usefull life. To reflect this non cash expense Depreciation of value of fixed assets has been recognized.
By Charging depreciation expense an entity is following two main priciples of accounting. 1) Matching Principle: matching income against expenses of the related period. 2) Prudence: recording all the expenses (not understating expenses.
By charging depreciation an entity reflects the correct value of the fixed assets and hence giving true and fair view of the financial position of the entity.
Depreciation is a expenditure and also a reserve . For purchasing Asset at the end of life of the asset. Claiming tax benifits.
The purpose of depreciation is to make the book value of fixed assets matching with a market value in accounting books.
Depreciation is quantified cost of wear and tear the fixed assets undergo in the process of being used in the business. While computing the cost of production, the share of depreciation is also added to the overheads. This would in a way give a proper picture of the profits of the concern. Further, some concerns also practice investing the depreciation in a separate fund so that the same could be used for replacing the present fixed assets as and when it is found to be obsolete. As stated above, the cost of production includes depreciation. Since the depreciation is part of cost of production and cannot be correctly quantified. accounting practice is to charge a certain percentage to the profits. .
We charge depreciation because most of the long-lived assets used in a business have 1) a significant cost, and 2) they will be useful only for a limited number of years. The matching principle (a basic underlying accounting principle) requires that the actual cost of these assets be allocated to the accounting periods in which the company will benefit from their use.The depreciation reported on a U.S. corporation's external financial statements is computed by spreading an asset's cost (less any salvage value) over the asset's service life or useful life. For example, equipment with a cost of $500,000 and no salvage value at the end of an assumed useful life of 10 years will likely result in matching $50,000 to each full accounting year. (The U.S. income tax rules allow accelerating the depreciation amounts, but the total cannot exceed the asset's cost.)Examples of the assets that must be depreciated include machinery, equipment, fixtures, furnishings, buildings, vehicles, etc. These assets are often referred to as fixed assets or plant assets, and the amounts spent are part of a corporation's capital expenditures. (Note that land is not depreciated because it is assumed to last indefinitely.)
According to the matching principle , each period should expense meet revenue for the period , depreciation is consider expense and should charge as expenses in order to get proper financial statements.
Causes Of Depreciation:
2. Some Assets get worn or torn out due to its constant use in production.
3. Some Assets get decreased in their value with the passage of time.
4. Some Assets may meet an accident and therefore it may get depreciated in its
value.
Reasons For Providing Depreciation:
1. To reveal the correct profit or loss of a business.
2. To show correct financial position of a business.
3. To make provision for replacement of an asset.
Depreciation is done to match or show the consumption of economic benefit of the asset over the useful life.
The purpose of depreciation is to match the cost of a productive asset to the revenues earned from using the asset.
AS PER THE ACCOUNTING PRINCIPLE NET REALISABLE VALUE
