Question

Evaluate the advantages and disadvantages of depreciation as an accounting concept - on balance, do you think the measurement of depreciation aids accounting practice?

Answer 1

Part 1

The purpose of depreciation is to allocate a resonable proportion of the cost of fixed asset over its useful life.

The advantages of depreciation as an accounting concept are -
1. Matching Expense with Revenue
It fairly allocate the expense incurred as a result of using of asset during an accounting period and match with the revenue that was generated by using the asset.

2. Fair Valuation of Assets
Value of an asset decline due to wear & tear and other reasons. Reporting fixed assets along with depreciation shows a true and fair financial position of an entity.

3. Replacement of Assets
Fixed asset is a huge asset that is used for several years and after expiry of useful life, it is replaced with a new one. Depreciation accounting provides a source of fund that is used to buy a new asset for replacing the old one.

4. Tax Saving
Depreciation expense reduces the revenue while computing the taxable income. Thus, it is saving amount of tax equivalent to tax rate on it.

The disadvantages of depreciation as an accounting concept are -
1. Difficult in replacing asset
Depreciation is charged on historical cost of asset. So, using this concept, replacement of old asset with a new one is not possible in practical.

2. Determination of correct life span of asset
Determination of correct life span of an asset is difficult to ascertain. A wrong estimated life of asset leads to wrong calcuation of annual depreciation.

3. Complexity in calculation
The calcualtion of depreciation is complex.

Part 2

Yes.
The objective of financial accounting is
1. to determine true profit & loss
and
2. to show the correct financial position of an entity in an accounting period.
Measurement of depreciation is a complex work
but
it is important for attaining objectivity of accounting.