Advantages and Disadvantages of Depreciation

Accounting Challenge 2
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Advantages and Disadvantages of Depreciation
           One of the advantages of depreciation is matching expenses. Depreciation helps companies accurately state incurred expenses to correctly match with the revenue generated in a similar period (Tenio, 2019). When a company purchases equipment, it calculates and records its expenses on the books. Doing so helps the corporation keep track of its assets and determine the amount of revenue it generates. Lack of depreciation can result in over or under-stating total asset expenses, which, in turn, leads to misleading financial information (Accounting4me).
           Another advantage is asset valuation. Various factors like wear and tear, natural resource usage, and inefficiency decrease the asset value over a particular period (Radu & Marius, 2011). The assets should be indicated correctly on the balance sheet to present a company's real state of affairs. This allows for the recovery of an asset's purchase cost. An asset's net book value (NBV) is the asset's accumulated depreciation minus the original purchase cost (Accounting4me). Using depreciation to report the asset value helps in analyzing the company position, bearing in mind that the depreciation value is more accurate. Simply put, depreciation helps businesses report the correct NBV of a given asset.
           Another benefit is tax reduction. Through depreciation, an organization can receive tax benefits that come with recording the expenses. If the company does not charge depreciation on an asset, its profit and loss (P&L) account will indicate high profits, leading to more taxes (Accounting4me). However, depreciation charges on assets will save the company the amount of tax charged, equivalent to its tax rate because it is shown as an expense in the company's P&L account (Lawrence & Okechukwu, 2013). This reduces the profit on the P&L account, which in turn lowers the tax rate. 
Despite the many advantages of depreciation, there ar...