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How does it help in matching expenses with revenues?
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What would happen if depreciation was not recorded?
Why is depreciation important in accounting?
Number of replies: 1
In reply to MUHAMMAD FIRDAUS BIN AMINUDDIN
Re: Why is depreciation important in accounting?
1. Matching Principle
Depreciation helps match the cost of an asset with the revenues it generates over its useful life. Instead of charging the entire cost of an asset as an expense when purchased, depreciation spreads the expense over multiple periods. This provides a more accurate picture of profitability in each accounting period.
2. Reflects Asset Usage and Wear & Tear
It recognizes that assets lose value over time due to use, wear and tear, obsolescence, or aging. Depreciation accounts for this decline in value.
3. Accurate Financial Reporting
By allocating the asset cost systematically, depreciation ensures that the balance sheet shows the net book value of assets (cost less accumulated depreciation), providing a more realistic valuation.
4. Tax Benefits
Depreciation expense reduces taxable income, leading to tax deductions for businesses, which can impact cash flow and financial planning.
5. Helps in Asset Management and Replacement Planning
Tracking depreciation helps businesses understand when assets are nearing the end of their useful life, aiding decisions about replacement or upgrades.
Depreciation helps match the cost of an asset with the revenues it generates over its useful life. Instead of charging the entire cost of an asset as an expense when purchased, depreciation spreads the expense over multiple periods. This provides a more accurate picture of profitability in each accounting period.
2. Reflects Asset Usage and Wear & Tear
It recognizes that assets lose value over time due to use, wear and tear, obsolescence, or aging. Depreciation accounts for this decline in value.
3. Accurate Financial Reporting
By allocating the asset cost systematically, depreciation ensures that the balance sheet shows the net book value of assets (cost less accumulated depreciation), providing a more realistic valuation.
4. Tax Benefits
Depreciation expense reduces taxable income, leading to tax deductions for businesses, which can impact cash flow and financial planning.
5. Helps in Asset Management and Replacement Planning
Tracking depreciation helps businesses understand when assets are nearing the end of their useful life, aiding decisions about replacement or upgrades.