OBJECTIVES OF PROVIDING DEPRECIATION

The following are objectives of providing depreciation:

1. Ascertainment of true profits. When an asset is purchased, it is nothing more than a payment in advance for an expense. For example, if a building is purchased for Rs 10,000 for business, the effect of such a purchase will be saving in the cost of rent in the future. But, after a certain number of years, the building will become useless. The cost of the building is, therefore, nothing except paying rent in advance for a period of years. If the rent had been paid, it would have been charged as an expense for determination of the true profits, made by the business during a particular period. The amount paid for the purchase of building should, therefore, be charged over a period of time for which the asset would be serviceable.

2. Presentation of true financial position. The assets get depreciated in their value over a period of time on account of various factors, as explained before. In order to present a true slate of affairs of the business, the assets should be shown in the Balance Sheet, at their proper values.

3. Replacement of assets. Assets used in the business need replacement after the expiry of their service life. By pmviding depreciation a part of the profits of the business is kept in the business which can be used for purchase of new assets on the old fixed assets becoming useless.

 

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