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Depreciation provisions and arguing that, depreciation results in funds
the replacement of assets being available to replace the fixed asset

There is a widespread misconception that later on.
making a provision for depreciation means Exercise 7.4
that, money is invested somewhere to 1. Mwansesere Manufacturing
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finance the replacement of the asset when Company recently acquired a new
it is put out of use. Depreciation is simply a piece of machinery for its production
bookkeeping entry, and the end result is that, line. The machinery is expected to
it lowers the net profits as the provisions have a useful life of 5 years and a
have been charged to the statement of profit salvage value of TZS 10,000,000.
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or loss. Nevertheless, it is not surprising Mwansesere is considering two
to find misconception regarding this depreciation methods: the Sum of the
among many people including, accounting Years’ Digits method and the Units
students, teachers and accountants. They of Production method.
often think that, a provision is the same as
money kept or invested somewhere with Required: Compare and contrast the Sum
which to replace the asset eventually. Never of the Years’ Digits method and the Units
make that mistake: in fact, businesses do of Production method of depreciation in
not do so in practice. Usually, businesses the context of Mwansesere Manufacturing
use the money to finance working capital Company’s new machinery.
to generate higher returns than keeping it. 2. Marioo Manufacturing Company
recently purchased new equipment for
Cash can better be used in terms of re- its production line. A debate has arisen
investing in banks or other securities to at the management level regarding the
generate more wealth for the owners. necessity of setting aside a specific
Besides, with the availability of long-term amount each accounting period for
financing from banks and other financial depreciation. The Human Resources
markets, it has become practically easier manager has been insisting on setting
for businesses to borrow funds for buying aside a specific fund for depreciation.
non-current assets at relatively lower cost
and at a short notice. This has made the issue Required: Discuss whether the Human
of maintaining a sinking fund expensive, Resources Manager is correct or not.
outdated and unnecessary. A cautious owner
may take out less drawings if the net profit
is lower, but that is not a justification for

Student’s Book Form Five
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