Objectives of Depreciation Policy

Depreciation accounting attempts to allocate loss of the value of the asset over the period of its useful life in a rational manner. A wrong choice of the methods of allocation would affect the measurement of the asset in the balance sheets and income statements of the period subsequent to its acquisition. The essential aspects of the depreciation policy are, therefore, the decisions regarding the recognitions of depreciation itself and about a scientific method of allocating the expired out of the asset over periods of time. Such consideration provide important clues to the depreciation policy which must aim at providing correct information about the reported net income and thereby enable better decisions. It may be mentioned at the outset that though financial statements are used by a number of interested groups like Government, labour unions and others for decision-making, the depreciation policy of a business enterprise has direct impact on the decisions of the investors and management.

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