The concept of Depreciation and its Adjustment


The Depreciation Adjustment

A fixed asset is acquired by a business to be used over several years to generate profits.  It is logical therefore, that the cost of such an asset should not be charged in total against revenues of any one year, be it the year of acquisition or the year of disposal.  Such cost should be spread and charged against the profits for the years in which the asset is used.  This is in line with the matching concept. The spreading of the cost of a fixed asset over its expected life of benefit to a business is what is known as depreciation.

To calculate depreciation one needs to determine the following variables:

            a)         The cost of the asset
            b)         The estimated useful life of the asset
            c)         The salvage value expected at the end of useful life, if any.

The cost of the asset as reduced by the salvage value is divided by the asset's estimated useful life to obtain a figure of depreciation to be charged against profits every year during the useful life of the asset.

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