What is the purpose of funded depreciation?

Funded depreciation is primarily aimed at allocating earnings for capital asset replacements. This practice involves creating a reserve of funds that can be used to replace or maintain long-term assets as they depreciate over time. The rationale behind this approach is to ensure that a company has sufficient financial resources set aside specifically for future capital expenditures. By doing so, the company can avoid financial strain when the need arises to replace or repair its assets, thereby maintaining operational efficiency.

This strategy is especially important for businesses that rely heavily on significant physical assets, such as manufacturing equipment or vehicles, which have a finite useful life and will eventually need to be replaced. By planning for these expenses through funded depreciation, companies are better positioned to manage their long-term capital investment needs effectively.