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Why do we make Provision for depreciation a/c?
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Why do we make Provision for depreciation a/c?
The function of a depreciation provision is to make a company's balance sheet more accurately reflect the current value of the investments it has made in fixed assets over time. ... The depreciation provision gradually lowers this book value over time to reflect its declining real value.
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Why do we make Provision for depreciation a/c?
Introduction:
Provision for depreciation is an accounting entry that represents the gradual decrease in the value of an asset due to wear and tear, obsolescence or any other factor that reduces its usefulness.

Reasons for making Provision for Depreciation A/C:

1. Matching principle: This principle requires that expenses should be matched with the revenue they help to generate. Provision for depreciation ensures that the cost of an asset is spread over its useful life, so that the expense is matched with the revenue earned from its use.

2. Consistency: Depreciation is a non-cash expense that does not involve any actual payment, but it has a significant impact on the financial statements. The provision for depreciation ensures that the depreciation expense is calculated consistently over time, which makes it easier to compare financial statements from different periods.

3. Asset valuation: The provision for depreciation is used to reduce the carrying value of an asset on the balance sheet to its estimated recoverable amount. This helps to ensure that the assets are not overstated on the balance sheet, which would result in an overstatement of the company's net worth.

4. Funding replacement: The provision for depreciation helps to set aside funds for the future replacement of the asset. By setting aside funds gradually over the life of the asset, the company can avoid a sudden financial burden when the asset needs to be replaced.

5. Taxation: Depreciation expense is tax-deductible, which reduces the taxable income of the company and therefore, the amount of tax it has to pay. The provision for depreciation is used to calculate the depreciation expense, which in turn reduces the tax liability of the company.

Conclusion:
In conclusion, the provision for depreciation is an important accounting entry that helps to match expenses with revenue, ensure consistency, value assets correctly, provide for future replacement and reduce tax liability. It is essential for companies to make provision for depreciation to accurately represent the financial position of the company and provide reliable financial statements to stakeholders.
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Why do we make Provision for depreciation a/c?
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