Objectives of Providing Depreciation

The objectives of providing depreciation are as follows:

 (i) To ascertain the correct profit: When a particular asset is used for earning the income of the business, the depreciation in the value of assets should be deducted from the income in order to calculate the correct and real profit of the business.

(ii) To present true financial position: In order to show the true financial position of the business in the balance sheet, it is necessary that assets must be shown at their true values after deducting reasonable depreciation. If depreciation is not provided, the assets will be overstated in the financial statements and it will be against sound business principles.

(iii) To make provision for replacement of assets: Since depreciation is a non-cash expense, the amount charged can be kept separately and utilised for the replacement of the fixed asset after the expiry of the useful life of the asset.

(iv) To ascertain the proper cost of the product: In order to ascertain the cost of production, it is necessary to charge depreciation as an item of cost of production.

(v) To maintain the capital invested in the cost of the asset intact in the business so that it can be reinvested in profit earning process.

(vi) To derive maximum tax benefit.

(vii) To meet the legal requirements: In the case of joint stock companies, it is necessary to charge depreciation on fixed assets before declaring dividends.