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Provision for depreciation

akash (no) (160 Points)

30 June 2012

why do we make provision for depreciation on fixed assets. i m so confused if depreciation is there then why we need provision for depreciaton..please tell me in detail.

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4 Replies

Ganeshbabu K (Audit and Tax Advisory) (48559 Points)
Replied 30 June 2012

1)correct caluculation of cost of production: depreciation is nothing but an allocated costof a fixd asset.it is to be caluculated and charged against the revenue of an accounting period.it must correctly incuded with in the cost of production

2)correct caluculation of profits: consumed cost of assets(depreciation)has to be provided for correct matching of revenues with expences

3)correct disclosure of fixedassets at reasonable value: unless depreciation is charged depreciable asset cannot be correctly valued and presented in the balancesheet.deppeciation is charged so that B/S exbhits a true and fair view of affairs of company

4)provision for replacement cost: DEP is a non cash exp,net profit is caluculated after providing dep,,though annual depreciation cash resources saved and accumulated to provide replacement cost at the end of use ful life of asset

5compliance with legal requirements: to comply with relevent provision s of incometax act,company act

Giridhar S Karandikar (Team Lead) (7543 Points)
Replied 05 July 2012

There are different methods of showing depreciation. Small and medium business concerns post the following entry for depreciation. In this case the effect is directly given to the Fixed Asset

Depreciation Dr

To FA

some big concerns dont post the entry for depreciation as shown above. they post the entry as follows.

Depreciation Dr

To-Provision for Depreciation

In the above case the provision for depreciation ie either shown as an non-current liability in the B/s or it is shown as below. In this case you know the Cost of the FA & the depreciation you have provided till date. so this would be the proper method of showing depreciation.

Fixed Assets at Cost xxxxxx

Less: Prov fopr Dep xxx

Net Book Value xxxxxxx

So dont get confused between depreciation & provision of depreciation. It's just the way of disclosure.

dig vijay (ok) (151 Points)
Replied 06 July 2012

see whenever we create depreciation provision in our p/l a/c we reduce our profit by such amount ...

since it is a non-cash expense(i.e. it doesnt have any effect on our cash balance) so in a way saves our cash from being distributed as dividend which could be used when the said assets attain its salvage point............. thus it is very beneficial for replacement of our asset............