in the balance sheet. The balance represents the value of benefit that is yet to be derived from them. The written down value is the true value of fixed assets which represent cost not yet written off. The balance sheet must represent a true and fair view of financial status.
Hence, fixed assets must be shown at their at written down value. (iii) To facilitate replacement of fixed assets When the depreciation is debited to profit and loss account, an equal amount is either retained in the business or invested outside the business. When the useful life of an asset comes to an end, a new asset can be purchased by using the resources available in the business. (iv) To avail tax benefits As per the Indian Income Tax Act, while computing tax on business income, depreciation is deductible from income.
Hence, depreciation is computed and charged to profit and loss account to reduce tax liability. (v) To comply with legal requirements Depreciation is provided on fixed assets to comply with the provisions of law apart from Income Tax Act. For example, Section ( ) of the Indian Companies Act, , requires every company to provide depreciation on fixed assets before declaring dividend to its shareholders. .
Causes of depreciation There are different reasons causing the reduction in the book value of the fixed assets. Such causes are as follows: (i) Wear and tear The normal use of a tangible asset results in physical deterioration which is called wear and tear. When there is wear and tear, the value of the asset decreases proportionately. (ii) Efflux of time Certain assets whether used or not become potentially less useful with the passage of time.
(iii) Obsolescence It is a reduction in the value of assets as a result of the availability of updated alternative assets. This happens due to new inventions and innovations. Though the original asset is in a usable condition, it is not preferred by the users and it loses its value. For example, preference of latest computers by the users.
(iv) Inadequacy for the purpose Sometimes, the use of