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

Depreciation Meaning

Depreciation is the decrease in the value of Fixed Assets over a period of time. In other words, depreciation means a decrease in the value of an asset due to normal wear and tear, obsolescence etc.

Advantages of Depreciation

1. Correct calculation of the cost of production. Depreciation is to be calculated and charged correctly against the revenue to arrive at the correct cost of production.

2. Depreciation helps to calculate actual profit. All costs incurred for earning revenues must be charged properly for correct calculation of profits, depreciation is one of them.

3. It helps to report fixed assets at a reasonable value.

4. Depreciation acts as a provision for the replacement cost of fixed assets.

Disadvantages of Depreciation

1. Depreciation completely ignores market value of assets.

2. It's not applicable to all type of fixed assets.

3. Depreciation decreases the profit of an organization.

4. Depreciation does not consider the actual usage of an asset.

Do you think the measurement of depreciation aids accounting practice?

Yes, definitely. Charging depreciation against the fixed asset is very important, as a company needs to report the fixed assets in its actual value. It is important to arrive at the actual cost of production, thus help a company to report actual profit considering all cost of production. It also helps a company to save tax.