Reasons For Charging Depreciation - SS1 Accounting Lesson Note
The primary reason for charging depreciation is to accurately account for the loss in value of a fixed asset over time and to match the expenses associated with the asset with the revenue it generates. Depreciation is charged for several reasons, and they include:
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Wear and Tear: As a tangible asset is used, it tends to wear out, lose value, or become obsolete over time. Depreciation is charged to recognize this gradual loss in value.
Matching Principle: Depreciation allows a company to match the cost of an asset with the revenue it generates over its useful life. This principle ensures that the expenses related to an asset are recognized in the same accounting period as the revenue it generates.
Capital Recovery: Depreciation helps to recover the cost of a fixed asset over its useful life. Since the cost of a fixed asset is usually a significant amount, depreciation helps to spread the cost over the asset's useful life rather than all at once.
Taxation: Depreciation is also a tax-deductible expense. By charging depreciation, a company can reduce its taxable income and hence pay less tax.