Depreciation expense is the periodic wear and tear in the value of fixed assets over their useful life. Depreciation is charged in the income statement as an expense and is deducted from the cost of assets to reach the carrying value of the fixed assets.
Depreciation is calculated using various methods.
1. Straight-line method = (Cost – Residual Value) / Useful Life
2. Reducing balance method = (Cost – Accumulated depreciation) x Depreciation rate
3. Units of production method = Cost x units produced in the period / total units
The rule behind charging the depreciation using an appropriate depreciation method is the matching concept, which states that the expenses should be charged in the pattern of generating revenues from an asset.
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