Question
What are the objectives for charging Depreciation ?
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Answer
Depreciation is different kind of expense then other routine expense of business. It is notcash paid expenses in respective accounting year. It is provided in respective accountingyear and incorporated in the accounts. The following arguments specify objectives ofdepreciation:
$(1)$ To know true and fair profit : It is essential to consider depreciation to know thetrue and fair profit-loss of the business. Thus is it debited to profit and loss account.
$(2)$ To know true and fair financial position of business : Balance sheet discloses economic position of the business, where depreciable assets are show after deducting depreciation. Due to the disclosure of assets after depreciation, balance sheet reflects true position.
$(3)$ To maintain capital : The significant share of total capital is employeed in fixedassets. These assets become useless at the end of their useful life. To acquire new assets,replacing these assets, capital is needed.
$(4)$ To determine correct selling price of product or service: To arrive at a selling priceof a product or service total cost is determined, where depreciation is included.
$(5)$ To comply with legal provision: A computation of depreciation and its recording inaccounts are done accordingly to legal provision.
$(6)$ To be treated as business expense : Depreciation is a revenue expense of the respective accounting year and which is not paid in cash.
$(7)$ To determine correct cost of production : To determine the cost of goods producedin the factory or services, expense affecting production or production related expensesshould be considered. Thus, like other expenses depreciation on depreciable assets usedin business is essential to be considered to determine the cost.
$(1)$ To know true and fair profit : It is essential to consider depreciation to know thetrue and fair profit-loss of the business. Thus is it debited to profit and loss account.
$(2)$ To know true and fair financial position of business : Balance sheet discloses economic position of the business, where depreciable assets are show after deducting depreciation. Due to the disclosure of assets after depreciation, balance sheet reflects true position.
$(3)$ To maintain capital : The significant share of total capital is employeed in fixedassets. These assets become useless at the end of their useful life. To acquire new assets,replacing these assets, capital is needed.
$(4)$ To determine correct selling price of product or service: To arrive at a selling priceof a product or service total cost is determined, where depreciation is included.
$(5)$ To comply with legal provision: A computation of depreciation and its recording inaccounts are done accordingly to legal provision.
$(6)$ To be treated as business expense : Depreciation is a revenue expense of the respective accounting year and which is not paid in cash.
$(7)$ To determine correct cost of production : To determine the cost of goods producedin the factory or services, expense affecting production or production related expensesshould be considered. Thus, like other expenses depreciation on depreciable assets usedin business is essential to be considered to determine the cost.
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