Main benefits or advantages of provision of depreciation can be studied as follows:
1. Helps To Measure True Profit Or Loss
Depreciation is charged against the income. It is a debit item of profit and loss account and deducted from the profit. So, provision of depreciation helps to ascertain true profit or loss of the firm for the given period.
2. Provision For Replacement Of Assets
Provision of depreciation helps to recover the cost of the existing assets and provides adequate funds to replace future assets after its useful life.
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Depreciation helps to reduce the taxable income because it is deducted from the profit. So, it provides tax benefits by lowering the income.
4. Asset Valuation
Provision of depreciation helps to determine the net book value of the existing assets. Net book value of the asset is calculated by deducting the depreciation amount from its purchase price.
