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What is the effect of depreciation of assets on profits received by owners?
Depreciation forms a part of cost which is used for arriving at correct estimation of profits, which then is distributed to the owners of the business in the form of dividend. Addition of depreciation to the cost reduces the amount of distributable profits.
By maintaining a depreciation account a part of the distributable profit is retained in the business as a reserve which is used to purchase new machinery or for other purposes in the future which reduces the profits or dividends received by the owners.
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