What depreciation method to use

what depreciation method to use

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Depreciation

Depreciation represents the decrease in an asset's usefulness through the decrease of its value, culminating in an end to its efficacy and efficiency. Assets tend not to lose value evenly across their lifespans, and most methods other than revaluation tend to model the precise pattern loosely if at all.

Depreciation Using Revaluation

At the end of each time period, the asset is appraised and then assigned a new value based on the appraiser's judgment. Discrepancies between its value in the last and current periods are then deducted as depreciation expense. For example, if an asset valued at $10,000 in the last period but only $8,000 in the current period, then depreciation expense for the current period is $2,000.

Advantages of Revaluation

Revaluation is advantageous

in that it needs no other parameters to calculate and in that it produces a more accurate depiction of the pattern in which an asset's value decreases as it is used. Revaluation method requires only that the asset's value be manually reassessed in each period and does not need estimates of either its useful lifespan or residual value upon disposal to calculate depreciation expense.

Disadvantages of Revaluation

Revaluation method is disadvantageous in that its numbers are based on the individual appraiser's opinion rather than any comparatively objective standard of measure such as the market prices that most depreciation methods are based on. Furthermore, revaluation method produces a different depreciation expense in each period of the asset's use even when there should not have been large differences between its use in those periods.

Source: ehow.com

Category: Bank

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