Discuss The Importance Of Depreciation. :: essays research papers fc

Title Discuss the importance of depreciation expenses.Depreciation as a concept and in practice plays a very important utilization in a companys cash flow hence in funding. The reasons are basically two, firstly beca engagement depreciation is a way of self finance for an organization and secondly because is a way of decreasing taxes that the government claims as the company doesnt have to pay taxes on depreciation which consequently enlarges the cash flow of the company.As a term depreciation in accounting is the process of allocating the cost of a capital summation over the period of its useful life. Depreciation takes into account the decrease in the service potential of capital assets invested in a business venture, resulting from such causes as physical wear and tear in ordinary use, deterioration by natural elements or obsolescence caused by technological changes. Basically depreciation is a exhalation in value or a diminishment in market price of a good always taking the period factor into account. Depreciation is a rate of change in value in an asset fixed or current compared to the present value of that asset. For example if a company purchases machinery for the doing of a certain product the management must take under consideration the equipments life cycle, meaning that this machinery has a certain period of time in which it can contribute to the production in the beginning it becomes use slight. Useless in a sense of a newer machine will be invented in just about years which will be probably faster or more capable to produce better quality. The time factor of course always varies depending on the asset. For example the usefulness of a computer may be three years before it needs replacing, as for a building may be fifty years.A Mercedes van for instance in year 2000 could be purchased at the value of 13 million drachmas and its productive life span before it needs to be replaced will probably be 8 years. After the 8 years the van purchased wou ld cease from being of any productive use to the company and if it needs to be resoled its market value would have depreciated drastically due to the time fade from the initial purchase. Its devaluation is its year zero value less an annual percentage of the devaluation process updated annually.But depreciation doesnt apply only to current assets but also is applicable to fixed assets as well.