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Objectives for Providing Depreciation

To ascertain the true results of operations: For proper matching of costs with revenues of that period, depreciation should be charged; otherwise it would result in an overstatement of profit. As a result of this, the income statement will not show a true and fair view.

  • To ascertain true position statement: Value of depreciation should be adjusted against the fixed assets in the Balance Sheet to ascertain the true financial position.
  • To ascertain the true cost of production: To ascertain the true cost of production, it is necessary to charge depreciation as a cost of production. Otherwise, it leads to a wrong presentation of costing records.
  • To accumulate funds for replacement of assets: The assets used in business need to be replaced after the expiry of their service life. By providing depreciation, a part of the profit is kept aside every year, which can be used for the replacement of assets, when an old asset becomes scrap.
  • To comply with legal requirements: According to Companies Act, 1956, it is mandatory for Companies to charge depreciation before it declares dividend.

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