Depreciation Interview Question:

Does depreciation generate funds for replacement of assets?

Submitted by: Administrator

Yes, depreciation generate funds for replacement of assets. When depreciation is charged against the asset, a significant portion is taken out of the profits every year during the lifetime of the existing assets, and is retained and accumulated without being distributed to the owners as dividend. Thus at the end of the life of the existing asset, the business will have some funds to replace old asset with the new one.
Submitted by: Administrator