“Depreciation Funds – a major source of finance”

Some finance manager consider depreciation funds are the major part of internal sources of finance,  which is used to meet the working  capital requirements of the business  concern. Depreciation is the reduction of asset value due to wear and tear, lapse of time, obsolescence, exhaustion and accident. Generally, depreciation is charged against non-currents assets (Fixed assets) at a fixed rate for every year. The purpose of depreciation is to replacement of fixed assets after the useful of assets. It is one kind of provision fund, which is needed to reduce tax burden and overall profitability of the company.

Again, some finance manager don’t agree that depreciation is a source of funds, or source of cash.

However, depreciation expenses is reported as a positive amount on the statement of cash flows using indirect method by adding back to net income which indicates depreciation is the part of company cash flow.