Does the recognition of depreciation in the accounts provide a special cash fund for the replacement of fixed?

Question

assets? Explain.
Describe the nature of depreciation as the term is used in accounting.

Answer 1

Depreciation refers to the allocation of an asset's cost to the accounting periods benefited. When you buy an asset, the cost goes to the balance sheet. However as the company continues to use the asset to generate revenue, the asset will deteriorate from wear and tear and technological obsolescence. Depreciation is an expense in the income statement to recognise this using up of the asset. By the end of its useful life, all its cost would have been transferred from the balance sheet to the income statement.

Depreciation is the debit with the corresponding credit being to accumulated depreciation which is contra against the asset. This is just a journal entry and does not put cash aside for its replacement.