Businesses use fixed assets such as plant, property and equipment in generating revenues and as infrastructure for the business. Fixed assets are not charged to the profit and loss account rather they are reported on the balance sheet and they stay on the balance sheet.
The purpose of depreciation is to charge an element of the fixed assets annually to the profit and loss account to reflect the usage of the assets during the year. Depreciation will continue to be charged to the profit loss account until the carrying value of the fixed assets have been fully depreciated that is if the net book value of the fixed asset becomes zero. Depreciation should cease once the net book value or carrying amount of a fixed asset becomes zero.
