Advantages And Disadvantages Of Depreciation

Depreciation is the loss in value of an asset over time until the value becomes zero or negligible. A company can deduct the cost of the fixed assets by making sure they are in compliance with the relevant tax laws surround depreciation. When a company makes large purchases, they will record the items as assets. Examples of fixed assets are buildings, computers, and furniture or in the construction industry machinery etc. The only asset that cannot be depreciated is Land. This is because the value of land increases with time. Expensing these items when purchased would create an inaccurate net income i.e. profit overstated. All fixed assets are expected to be less efficient as time goes on. During each accountancy period a calculated cost of these assets is used up. This figure is referred to as depreciation expenses on the income statement. Depreciation is calculated as the estimate of this measure of wear and is recorded in the Profit & Loss report. For a company to accurately keep track of an asset’s depreciation, they must keep a copy of the receipt or invoice as proof of payment. When an asset has been fully depreciated, it is "off the books" of the company. In the case of an asset having a salvage value then this figure would

It helps companies accurately state incurred expense. Lack of depreciation can lead to over or under stating total asset expenses, this can then lead to misleading financial information.

2. It also helps businesses report the correct net book value of a given asset. Assets experience wear and tear from daily use, the actual value declines over time, depreciation helps show this.

3. Depreciation allows for companies to spread the cost of an asset over its lifespan. This allows companies to replace future assets using the appropriate amount of revenue.

4. There are tax rules that make depreciation tax deductible. A greater depreciation expense lowers taxable income and increases tax