Business Accounting and Bookkeeping

What is the purpose of depreciation?


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2011-10-14 08:28:22
2011-10-14 08:28:22

Depreciation provides a means to report assets on the balance sheet at a more realistic value than original purchase prices. This makes the financial statements more meaningful to users.

Depreciation has two main purposes.

-- The first is to provide for proper matching of revenues and expenses. Fixed assets provide benefits to a company throughout their useful lives. Thus, some of the expense from purchasing the assets should be recognized during each period of the assets' estimated useful lives. For example, if a farming company buys a tractor, the tractor helps to provide revenue each period. It is appropriate that some of the cost of the tractor be recognized each period to "match" it with the revenue the tractor is producing. If the tractor was not depreciated and instead was expensed in the period in which it was purchased, that period would unfairly bear all of the cost of the tractor, and net income would be understated. Future periods would receive the revenue generated by the tractor but none of the associated costs, and net income in those periods would be overstated.

-- The second purpose is to properly value fixed assets on the balance sheet and account for their devaluation over the course of their lives. If the tractor in the above example was purchased for $20,000, after one year of use it would no longer be worth $20,000. It might only be worth $15,000, for example.


Depreciation is an application of the matching principle in accounting and is designed to reflect the fact that some assets are used to generate profits over multiple accounting periods. Using depreciation the cost of an asset is spread out (or "written off") over the number of periods you expect it to be of use (called the asset's "Useful Economic Life"). Some people, including some accountants, will tell you that depreciation is an attempt to show the reduction in the value of the asset. This is wrong. If you want to show the value of an asset then you revalue it.


Related Questions

Not, depreciation is not deductible for tax purpose. Because it is not wholly exclusively in production

No. depreciation is compensation for a loss of value. You can make repairs or do whatever you choose with it.

Depreciation expense reduce the cost of asset through income statement for the useful life of asset and accumulated depreciation account is contra account for asset account in balance sheet to show the total amount of depreciation charged.

to preserve the corpus for the remainder beneficiaries

To preserve the corpus for the remainder beneficiaries

Accumulated depreciation and depreciation are related with each other as depreciation is annual expense while accumulated depreciation is the sum of all annual depreciation expenses.

Accumulated depreciation shows the depreciation for specific asset which is already charged while provision of depreciation is created to charge depreciation before actual depreciation is occur.

Depreciation expenses is for one specific fiscal year while accumulated depreciation is the sum of all depreciation expenses that’s why accumulated depreciation exceeds the depreciation if there is depreciation expense in prior year as well.

Depreciation is not a cause of reduction of cash from business, so in indirect method depreciation is added back to net income to arrive at actual cash flow from net income and non cash items are either added or deducted for this purpose.

Depreciation policy is management thing that what depreciation method to use and how much depreciation to charge to each asset. Depreciation concepts are concepts which govern the depreciation process which management cannot change they are universal rules to follow depreciation that how straight line depreciation work etc.

[Debit] Depreciation expense[Credit] Accumulated depreciationAfter that depreciation is shown as part of income statement while accumulated depreciation goes to balance sheet.

Debit depreciation accountCredit accumulated depreciation

Depreciation is for a particular year (say for Year 3). Accumulated depreciation is the aggregate of depreciation from the beginning (say from Year 1 to Year 3)

Every thing will have depreciation . depreciation is rule of nature.

The accumulated deprecation is the all the depreciation amounts should be the accumulated depreciation.

[Debit] Depreciation account [Credit] Accumulated depreciation

Depreciation expense is part of income statement all other expenses are also part of income statement and that's the main purpose of preparing income statement to show all incomes and expenses.

When allocating depreciation, the two accounts affected will be an expense account - depreciation and a negative asset/contra-asset - accumulated depreciation. The journal entry would be: Dr Depreciation xxxx Cr Accumulated Depreciation xxxx This effectively raises the expense and decreases your asset. In the general ledger the depreciation account will be debited and the accumulated depreciation will be credited.

Appreciation is an antonym for depreciation.

There are three types of depreciation. Fixed Installment, Diminishing balance and Component Depreciation.

No. Accumulated depreciation is depreciation accumulated every year and it will only increase and won't decrease. Depreciation expenses is incurred every year.

Using accumulated depreciation and depreciation expense is a way that businesses can realize the true value of assets. A piece of equipment, for example, is devalued every year by the process of amortizing the asset. This in turn is recorded as depreciation and depreciation expense.

Provision of depreciation account is the account of provision of depreciation.First of all we should understand provision of depreciation .Provision of depreciation is the collected value of all depreciation. With making of this account we are not credited depreciation in asset account. But transfer every year depreciation to provision of depreciation account. Every year we adopt this procedure and when assets are sold we will transfer sold assets 'total depreciation to credit side of asset account. For calculating correct profit or loss on fixed asset. This provision uses with any method of calculating depreciation.

"Depreciation Expense" is a Debit entry and the counter entry is "accumulated depreciation" on an asset which is a credit entry. Depreciation - DR. Amount X Acc. Depreciation - CR. Amount X

In accounting, depreciation is an allocation of a previous expenditure, while in economics depreciation represents a decline in current value.

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