Need or objectives of providing depreciation can be studied as follows:
1. To Replace Fixed Assets
The main objective of charging depreciation is to accumulate adequate fund to replace old asset with the new one after the useful life.
2. To Reveal True Financial Position
Depreciation is charged to fixed assets which helps to show the current value of the asset. Therefore it helps to show true financial position (assets and liabilities position) of the business.
3. To Reduce Tax Liability
Amount of depreciation is deducted from the operational profit of the business which reduces taxable liability of the firm.
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4. To Determine True Profit
Depreciation (the decline in the book value of fixed assets) is charged to revenue like other operating expenses. So, it helps to determine true profit of the firm.
5. To Determine Cost Of Production
Depreciation should be charged to fixed assets like machinery and plants in order to determine true or actual cost of production.
