Depreciation

Question 1

Name 3 purposes of depreciation

Answer 1

Matching Cost with Revenue:
Depreciation ensures that the cost of a non-current asset is allocated over the periods in which it helps generate revenue. This follows the matching (accruals) principle.

Reflecting Asset Usage and Wear & Tear:
It recognises that assets lose value over time due to usage, obsolescence, or passage of time, providing a more realistic measure of the asset’s current worth.

Accurate Profit Measurement:
By spreading the asset’s cost over its useful life, depreciation ensures profits are neither overstated if the full cost were expensed immediately) nor understated

True and Fair Presentation of Financial Statements:
Depreciation helps present a more accurate carrying value of assets on the Statement of Financial Position and more reliable expenses in the Income Statement.

Supporting Capital Replacement Planning:
It indicates the consumption of economic benefits, helping businesses plan for future replacement of assets when their useful life ends.