Depreciation is a
systematic allocation of the cost of a tangible asset over its useful life. It
reflects the decline in the asset's value over time due to factors such as wear
and tear, obsolescence, and physical deterioration. The objectives of providing
depreciation are:
- Accurate financial reporting: Depreciation
helps in presenting the true financial position of a company by allocating
the cost of an asset over its useful life. This allows companies to
reflect the actual value of their assets on their balance sheets.
- Maintenance of fixed assets: Depreciation
ensures that adequate funds are set aside for the maintenance and
replacement of fixed assets when they reach the end of their useful life.
- Determining tax liability: Depreciation is
used to determine the tax liability of a company. The amount of
depreciation recognized for tax purposes may be different from the amount
recognized for financial reporting purposes.
- Reflecting economic reality: Depreciation
reflects the economic reality of the decline in the value of an asset over
time. It helps to present a more accurate picture of a company's financial
health.
- Improving decision-making: Depreciation
provides relevant information to management, investors, and other
stakeholders, enabling them to make informed decisions about the
allocation of resources.
In conclusion, providing depreciation
is an important aspect of financial reporting and helps in accurately
presenting the financial position of a company, determining tax liability,
reflecting economic reality, and improving decision-making.
