Why do we need to make provision for depriciation????

why do we need to make provision for depriciation????



On account of the provision under section 205 that, no dividend shall be declared except out of profits

arrived at after providing for depreciation in accordance with the provisions of the Act, it has become

obligatory for every company distributing dividend to make a provision for depreciation.

Sub-section (2) of Section 205 prescribes different methods that may be adopted for computing the

amount of depreciation. There are summarised below:

(1) The charge on account of depreciation may be calculated in the manner required by Section 350.

As per the Companies (Amendment Act), 1988, the amount of depreciation was calculated with

reference to the written-down value of the assets as shown by the books of the company at the end of

the financial year expiring at the commencement of this Act or immediately thereafter and at the end of

each subsequent financial year, at the rate specified in schedule XIV. Thus, depreciation is now

required to be calculated in accordance with the rates specified in the new Schedule XIV to the Act and

thereby delinking in the Companies Act, 1956 from that under the Income Tax Act, 1961.

However the Companies (Amendment) Act, 2000 w.e.f. 13.12.2000 has amended section 350 and

deleted the words, " the amount calculated with reference to the written down value of the assets" by

the words, "the amount of depreciation assets". Therefore depreciation in future would be with

reference to amount as per books of account and which may be on SLM basis.

(2) However, it may be noted that schedule XIV to the Companies Act, 1956 provides rates as per

straight line method as well.

(3) The provision for depreciation may be made on any other basis approved by the Central

Government which has the effect of writing off by way of depreciation 95% of the original cost to the

company of each depreciable asset at the expiry of the specified period.

It is provided further that if an asset is sold, discarded, demolished or destroyed, for any reason before

depreciation if such asset has been provided in full, the excess of its written value, if any, at the end of

the financial year in which it is sold, discarded, etc. over its sale proceeds of scrap value, also must be

written off in that year, in which the asset is sold, discarded, demolished or destroyed.

(4) If a company possesses a depreciable asset for which no rate of depreciation has been prescribed

by the Companies Act, 1956 or the Rules framed thereunder, the amount of depreciation should be

computed on such basis as the Central Government may approve, either by any general order

published in the Official Gazette or any special order in a particular case.


@ nihar- Nice use of google. Keep it simple silly :-)


The need for provision for depreciation arises for the following reasons:
1) Depreciation must be considered in order to find out true profit/loss of a business.
2) If the cost of production is shown less by ignoring depreciation, the sale price will also be fixed at a low level resulting in loss to the business.
3) If depreciation is not taken into account, the value of asset will be shown in the books at a figure higher than its true value and hence the true financial position of the business will not be disclosed through Balance Sheet.
4) After some time an asset will be completely exhausted on account of use. A new asset then be purchased requiring large sum of money. If the whole amount of profit is withdrawn from business each year without considering the loss on account of depreciation, necessary sum may not be available for. buying the new assets.
5) According to Sec. 205 of the Companies Act, 1956 dividend cannot be declared without charging depreciation on fixed assets.

Total thanks : 3 times


Originally posted by : Vivek Gaur

@ nihar- Nice use of google. Keep it simple silly :-)

perhaps u would have written the same thing


Total thanks : 1 times


well shared nihar and deepak

keep up the good work


Tax Assistant (Accounting Technician CA FINAL CS PROF. PROG. B.Com)

Depreciation is nothing but the charge against the profit because of the use of machinery and all the other Fixed Assets which become obsolete in near future withing 10 or 15 years depending upon the type and use of the asset.

As the use of machinery we can not say how much do they cost per unit of production but we just write off in suitable basis over the useful life of the asset to know the exact cost incurred for each unit of production which was produced by the particular asset or class of asset...

Total thanks : 3 times

Asst. Manager - F&A

Deepak, your answer is absoultely perfect and understandable. Thanks/Satya


Originally posted by : satya

Deepak, your answer is absoultely perfect and understandable. Thanks/Satya

Thank you Mr. Satya. Looking forward for some useful contribution from you.

Senior Manager - Audit

Fall in the value of the asset or the remaining useful life of the asset, due to use, misuse or disuse of the asset, has to be reflected in the books of accounts as depreciation. This is the shortest way to explain the concept, I feel.




Your are not logged in . Please login to post replies

Click here to Login / Register  


Search Forum:

close x