Depriciation & Ammortisation

Importance of depreciation – Depreciation as seen under “Accounting Concepts” is to make a provision out of the income of the enterprise every year to take care of requirement of funds for replacing an old asset as and when it is worn out. Depreciation is an important tool in tax planning, as to the extent of depreciation claimed in business, the profits are less and so is tax. Thus depreciation is necessary for tax planning.

Depreciation also provides funds to the enterprise, as there is no cash outlay in this case, unlike other operating expenditure involving cash outlay. Again depreciation fund is not kept in any bank account, but invested in business assets only. Depreciation funds can be used along with internal accruals for repayment of loan installment.

Amortisation – There are certain expenses incurred in a business enterprise, like patent registration fees, copyright fees, franchise fees, preliminary expenses representing company incorporation expenses, public issue of debt or equity expenses like debenture and share capital etc. These are called deferred revenue expenditure as they are incurred at one point of time and get written off over a period of time against future income, unlike revenue expenditure that gets written off during the year in which it is incurred.

Further, these expenses give benefit for a long time to the enterprise but do not generate tangible assets. Hence they are also referred to as “intangible assets”.