Why do we Depreciate? Video Lecture | SSC CGL Tier 2 - Study Material, Online Tests, Previous Year

the objectives of that recession why do
we depreciate the first most important
reason they say is to provide funds for
a replacement
what is the entry for recording
depreciation is actually the
appreciation debit to asset while we
will discuss the accounting treatment in
detail the depreciation has been defined
as a loss in the value of an asset since
it is unlost it is an expense it is
shown as an expense in the profit and
loss occur so when we charge
depreciation the profits come now
depreciation is an expense profits come
down but there is no cash outflow on
account of depreciation money does not
go out because of depreciation the entry
for depreciation is depreciation debited
cash is not involved there was a cash
outflow only when we purchased in asset
so what happens is when we record
depreciation when we account for
depreciation in our books
profits come down with no outflow of
cash so this cash in a way gets retained
in the business if it remains in the
business in some form or the other in a
company for example or in any business
if we did not record depreciation the
profits would be higher if the profits
are higher it is possible that the
proprietor withdraws this money from the
business it is possible that the company
declares our dividend out of these
profits in which case this money would
move out of the misses but when we
charged
by reducing the profits without a cash
outflow in a way we retain the cash or
the fund within the business so one of
the main objectives of depreciation is
said to be to provide funds for this
next it is in order to find the true
prophet as we said before depreciation
is a loss in the value of listen and all
losses must be taken to the profit and
loss account must be accounted for in
order to bring the truth profit
depreciation is debited this
depreciation goes to profit and loss
account it is an expense it is a loss
and therefore it is taken to the profit
and loss if we do not charge the
appreciation the true prophet does not
get reflected through financial position
suppose we purchase a machinery for 1
lakh Tony intend to use it for five
years after using it for two years the
value of this asset is no longer one
lakh
I will not be able to sell this asset
for one its value has come down you to
use due to passage of time so if I
continue to show this machinery at one
like in my balance sheet my balance
sheet will not disclose the true
financial position therefore by reducing
by charging depreciation and recording
the loss in the value of the asset
bringing down the value of the asset I
show the true financial position they
are through the balance sheet the true
cost of production when I use machinery
when I use machinery to manufacture
goods the
cost of using this machinery should be
charged to the cost of the goods as we
said before another definition of
depreciation is the allocation of the
cost of an asset the allocation of the
cost of the asset over the lifetime of
the asset in such a manner so that the
benefits that we derive from the asset
can be matched against its use against
its cost so if I buy a machinery for 1
lakh and intend to use it for 5 years
and if I am them to get if I expect to
get the same benefit over 5 years I can
say that 20,000 per year would be
approximately the cost of the use of the
asset by using this asset every year I
have got a similar benefit there for the
goods which are produced by using this
machinery should also contain a certain
charge on account of the use of the
asset which is nothing but depreciation
therefore depreciation
helps to ascertain the true cost of
production depreciation is also required
and legally circularly as per the
Companies Act
we must charge deprivation in fact the
rates of depreciation are also displayed
in sheduled 14 of the Companies Act an
extract of schedule 14 has been shown
here this is scheduled for tina extract
of schedule 14 of the companies where
the rates of the appreciation of me