(a) To help ascertain the true net profit : Any business incurs certain expenses (costs) in order to earn revenue. Reduction in the value of assets used in the business processes is necessarily a part of the cost (Depreciation is an expense) and is accordingly shown in the P & L A/c of the period. The implementation of the concept of Matching Costs with revenue emphasises the role of depreciation in this implementation. Otherwise, the correct (or true) net profit will not be shown.
(b) To properly account for the cost of production : This goes with (a). Depreciation, being a cost of production, if not properly recorded in the P & L A/c, the cost of production will not be truly reflected, thereby impairing (a). Depreciation is an expense.
(c) To ensure that capital is not written flasks profit : If depreciation is not properly accounted for. profits (shown) will be higher (than actual) and when (the profits are) distributed, capital will be adversely affected. In course of time, the capital will be substantially and significantly reduced as it would have been distributed in the form of profits. Depreciation is a charge on profits.
(d) To help depict the correct financial position : If (a) and (b) are not duly attended to, and with (c) eventually resulting in such a case, the assets shown in the BS will not show the correct value; and the BS will not set out the financial position truly. Providing for depreciation is not optional but compulsory, and must be charged to the respective accounting period. Depreciation is a period cost, i.e. expense.
(e) To apprise creditors with correct information : Whatever ill-effects may be read from (c) and (d), when not warded off, would misinform and misguide potential creditors who would reasonably expect the assets of the business to stand as surety for any loans to be advanced to the business.
(f) To spread over a few years the financial burden of writing o flan asset : Generally, an asset continues to be useful in the business for much longer than just one, or just a few, years after its (first) purchase and installation; since the advantage thereof is available for many years, the financial burden thereof on the business should also be spread over a number of years; and to put all the burden on the P & L A/c of one year will be unreasonable.
(g) To provide for replacement of assets : Continuing on (f), time comes when the assets become useless (at melt-hr the present post of service) and need to be replaced. The maintenance of a depreciation fund provides (at least a part of) the funds needed to replace such assets.
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