Thread: Depreciation: Why is it important?
A business requires assets to operate and generate profits. These assets like Plant & Machinery, Equipment, Furniture etc are used to run the business.
A business requires assets to operate and generate profits. These assets like Plant & Machinery, Equipment, Furniture etc are used to run the business.
When a business purchases assets, they are used for longer duration. Eg: If a company purchase a machinery, It may be used in business for 10-15 years. Since the usability of asset is more than 1 year, the same cannot be treated as expense in 1 year and shown in P&L Statement.
But this machinery will become obsolete after 10-15 years, So how to provide impact of such obsolence?
By charging a certain amount to Profit & Loss statement every year in form of Depreciation.
By charging a certain amount to Profit & Loss statement every year in form of Depreciation.
Let's take an example here:
Assume a machinery of Rs. 1,00,000 is bought and has a useful life of 10 years.
Assume a machinery of Rs. 1,00,000 is bought and has a useful life of 10 years.
The depreciation will be Rs. 10,000 per annum (Rs. 1,00,000/ 10 years) and this will be charged to Profit & Loss Statement as this will depict the true picture of profit generated by business.
