Objects of Charging Depreciation

Eric Kohler defined depreciation as “the lost usefulness, expired utility, the diminution in
service yield.” Its measurement and charging are necessary for cost recovery. It is treated as
a part of the expired cost for an asset. For determination of revenue, that part or cost should
be matched against revenue. The objects or necessities of charging depreciation are :
I. Correct calculation of cost of production: Depreciation is an allocated cost of a fixed
asset. It is to be calculated and charged correctly against the revenue of an accounting
period. It must he correctly included within the cost of production.
2. Correct calculation of profits : Costs incurred for earning revenues must be charged
properly for correct calculation of profits. The consumed cost of assets (depreciation)
has to be provided for correct matching of revenues with expenses.

3. Correct disclosure of fixed assets at reasonable value : Unless depreciation is charged.the
depreciable asset cannot be correctly valued and presented in the Balance Sheet. Depreciation
is charged so that the Balance Sheet exhibits a true and fair view of the affairs
of the business.
4. Provision of replacement cost : Depreciation is a non-cash expense. But net profit is
calculated after charging it. Through annual depreciation cash resources are saved and
accumulated to provide replacement cost at the end of the useful life of an asset.
5. Maintenance of capital : A significant portion of capital has to be invested for purchasing
fixed assets. The values of such assets are gradually reduced due to their regular use
and passage of time. Depreciation on the assets is treated as an expired cost and it is
matched against revenue. It is charged against profits. If it is not charged the profits will
remain inflated. This will cause capital erosion.
6. Compliance with technical and legal requirements : Depreciation has to be charged to
comply with the relevant provisions of the Companies Act and Income Tax Act.