Eric Kohler defined depreciation as “the lost usefulness, expired utility, the diminution
in service yield.”
Its measurement and charging are necessary for cost recovery. It is
treated as a part of the expired cost for an asset. For determination of revenue, that
part or cost should be matched against revenue. The objects or necessities of
charging depreciation are:
(i) Correct calculation of cost of production: Depreciation is an allocated cost of a
fixed asset. It is to be calculated and charged correctly against the revenue of an
accounting period. It must be correctly included within the cost of production.
(ii) Correct calculation of profits: Costs incurred for earning revenues must be
charged properly for correct calculation of profits. The consumed cost of assets
(depreciation) has to be provided for correct matching of revenues with
expenses.
(iii) Correct disclosure of fixed assets at reasonable value: Unless depreciation is
charged, the depreciable asset cannot be correctly valued and presented in the
Balance Sheet. Depreciation is charged so that the Balance Sheet exhibits a true
and fair view of the affairs of the business.
(iv) Provision of replacement cost: Depreciation is a non-cash expense. But net profit,
is calculated after charging it. Through annual’ depreciation cash resources are
saved and accumulated to provide replacement cost at the end of the useful life
of an asset.
(v) Maintenance of capital: A significant portion of capital has to be invested for purchasing fixed assets. The values of such assets are gradually reduced due to
their regular use and passage of time. Depreciation on the assets is treated as an
expired cost and it is matched against revenue. It is charged against profits. If it is
not charged the profits will remain inflated. This will cause capital erosion.
(vi) Compliance with technical and legal requirements: Depreciation has to be
charged to comply with the relevant provisions of the Companies Act and
Income Tax Act.

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