Which of the following is/are true about depreciation?
I. Depreciation allocates non-cash expenses to period in which long-lived assets are used.
II. Depreciation provides funds for the replacement of an asset.
III. Depreciation charges arise due to an adherence to accrual method of accounting.
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A. B. C. D.C
Depreciation is the accounting device which facilitates a charging of the costs incurred in prior periods on assets that have been used for productive activities in the current period. Note that this is a non- cash expense since the cash left the firm's coffers at the time the asset was purchased (either in part or in full).
Remember, however, that depreciation has cash flow consequences indirectly through its effect on taxes. Depreciation expense owes its existence to the accrual method of revenue recognition whichrequires that expenses be matched with the revenues generated. No depreciation charges would exist under Cash accounting, which would allocate expenses as and when cash was used to make payments on asset purchases. Clearly, depreciation does not provide funds for anything for it is an accounting entry.