Depreciation Recovers The Investment

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Depreciation Recovers The Original Investment

There is a possible misunderstanding that the purpose of depreciation is to recover from revenues an amount sufficient to recover the original investment (i.e., acquisition cost). However, the cost recovery depends on the effective use of the asset rather than on depreciation policy. If the initial investments decision was sound and if assets have been managed effectively, the original cost will be recovered with enough funds left over to provide an adequate return on investment. The only purpose served by depreciation in such cases is that it reflects the extent of asset consumption leading to smaller dividends and retention of funds in the business. It is only the effect and not the reason for depreciation.

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