Answer each of the following questions What is the rationale

Answer each of the following questions What is the rationale for depreciating assets used in business?

Do you agree with it?

Does the rationale have any implications on capital formation – that is, investments by big businesses?

Does it favor one group of taxpayers versus another?

Are there any economic, social, revenue, or political implications?

Solution

What is the rationale for depreciating assets used in business? Ans. Depreciation is systmatic allocation of cost of a depreciable aasets Over its usefull life              Depreciation Exp = Cost of assets - Scrap value Estimated usefull life Fixed assets must be revalued regularly to ensure that the right cost is included in the accounting books. Depreciation is very much necessary for fixed assets because the fixed asset would lose its residual value due to the wear and tear, depletion, passage of time, obsolescence or accidents over a time period. Therefore, the actual value of the asset cannot be determined if we take the purchase amount in the books every year. Fixed assets are major expenses of any business and have a set life period of their own when used commercially. After a certain time period they become obsolete for use, and require the business to buy that particular asset again. Does the rationale have any implications on capital formation – that is, investments by big businesses? Ans. Yes   Fixed assets are aquired through purchase and capital transfers or taking loan or financial lease             Improvement in fixed assets The acquisition value includes acquisition taxes and fees and measures             all-up costs of fixed investment. Does it favor one group of taxpayers versus another? Ans. Yes Depreciation is favour in corporate assessee as compare to Individual assessee