Question 2

State briefly the need for providing depreciation.


Depreciation needs to be provided because an asset is bound to undergo wear and tear over a period of time. This reduces the working capacity and effectiveness of the asset. Hence, this should reflect the value of the asset, at which it is carried in the books of accounts.

1) For ascertaining the true profit or loss
2) For showing the true and fair view of the financial position
3) To ascertain the accurate cost of production
4) To provide funds for replacement of assets
5) To prevent the distribution of profits out of capital
6) For avoiding over payment of Income tax.

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