Why is depreciation charged?

हिन्दी में पढ़ें:

All fixed assets except land have a life and are useful only during their lifetime, but the life of an asset may depend on its nature, use, etc. The life of an asset begins when it is constructed, but in accounting the life of an asset begins when it is purchased.

As time passes, the productive capacity of the asset reduces and this reduction can be due to many reasons like usage, change in technology, wear and tear, inadequacy, etc. due to which the value of the asset starts decreasing which is called depreciation in accounting.

In the book, depreciation is charged according to a certain ratio, and in real life according to usage, time, etc., so there is a difference between both but at the time of selling the asset, it becomes equal. Whatever decrease occurs in the value of the asset in a year is shown as an expense on the debit side of the profit and loss account and this is done so that the actual value of the asset can be shown in the balance sheet.

Why is depreciation charged?

Depreciation is charged due to the following reasons:

1. To Calculate Profit or Loss:

Whether the business is making a profit or loss can be ascertained only when all the related income and expenses are shown in the profit and loss account. Depreciation is also an important element in the expenses shown in the profit and loss account. It is shown on the debit side of the profit and loss account.

2. For Valuation of Asset:

With the passage of time, the value of the asset starts decreasing, which has to be deducted from the asset so that the asset can be properly valued, and the correct value can be shown in the balance sheet, hence depreciation is charged on the asset. Note: The book value and actual value of the asset may differ because in the book, depreciation is charged according to a fixed ratio, and in the actual, depreciation is charged according to time, usage, technology, wear and tear, etc.

3. To Calculate Income Tax:

Every business that is liable to pay income tax has to pay tax and how much income tax to pay depends on the profit and the profit in a business is calculated through the profit and loss account and in the profit and loss account depreciation is shown as an expense due to which the profit gets reduced hence the income tax also gets reduced, that is why depreciation is charged on the asset.

4. For Replacement of Asset:

The life and productivity of assets get reduced due to the passage of time, usage, wear and tear, etc. due to which they need to be replaced with new assets after a certain time period so that the life and productivity of the asset can be increased. In this, depreciation helps in knowing how much life the asset has left and when it needs to be replaced.

5. To Calculate the Cost:

Depreciation is also charged on assets to calculate the cost of production as the assets are used to make the product. A business that prepares a manufacturing account shows the depreciation in the manufacturing account. Note: This shows only the depreciation charged on assets related to production.

Read Also:

• What is Depreciation? Meaning, Features, and More.
• Cause of Depreciation

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