Major Objective

The primary objective that a company pursues when it elects to use depreciation
accounting is a fair and easily understandable breakdown of expenses over time. If
a business paid for a new factory and did not account for its cost using a
depreciation method, its financial reports for the year would show a much smaller
profit, or even a loss, compared to prior years. Later, as the business used the
factory to produce goods and generate revenue, its profits would appear
unreasonably high since the factory presented no new cost in that year. Using
depreciation accounting allows a business to present a more accurate comparison
of its expenses and revenues in each fiscal period, delivering a clear image of its
financial position to shareholders, owners and market analysts.
Secondary Objectives
Depreciation accounting can serve several additional business objectives. For
example, businesses can use accounting data based on depreciation to produce
budgets that remain consistent even following major expenses. Without
depreciation, no organizational budget would ever include adequate funding for
expenses that drastically expand the company. Depreciation accounting also allows
business leaders to analyze how an asset's cost compares to the revenue that the
asset is used to generate on a year-by-year basis. Without access to this
information, the only way to judge whether an asset is worth its cost would be to
wait until the asset is sold or unusable and then compare total revenues during its
lifetime to its original cost.

Features Of Depreciation
Following are the main features of depreciation:
1. Depreciation is decline in the book value of fixed assets.
2. Depreciation includes loss of value of assets due to passage of time, usage or
obsolescence.
3. Depreciation is a continuing process till the end of the useful life of assets.
4. Depreciation is an expired cost and hence must be deducted before
calculating taxable profits.
5. Depreciation is a non-cash expense. It does not involve ant cash flow.
6. Depreciation is the process of writing-off the capital expenditure already
incurred.

1. For the replacement of assets: The fund equal to the amount of the depreciation is created
which will remain in the firm. After the expiry of the life of asset, the same fund can be utilized
to replace the new asset.
2. For the determination of true profit or loss: Depreciation is also an expense like repair
and maintenance which must be included in profit and loss account to ascertain the correct
profit or loss of a business for the year.
3. For the presentation of assets in the balance sheet at their proper value: Depreciation
must be charged to each fixed asset for the true and fair presentation of assets in the
balance sheet. The depreciation is deducted from the cost or book value of assets each year.
4. For the determination of correct cost of production: Correct cost of production can not
be ascertained if the depreciation is not charged to the fixed assets. Thus, it is necessary to
include amount of depreciation in the calculation of cost of each product.