Depreciation

• Depreciation - Is allocation of the cost of a non-current asset over its estimated useful life
• Cause of Depreciation:

  • Wear and tear
  • Obsolescence
  • Legal limit
  • Usages
• Wear and Tear - A non-current asset may decrease in value to physical wear and tear
• Obsolescence - The asset may become obsolete or out of date as newer and more efficient assets are available due to technological advancements
• Legal limit

  A non-current asset may decrease in value due to legal limits set on the use of the asset such as lease
• Matching Theory

  1. When a business uses non-current assets to generate income, a portion of the cost of the non-current asset is recorded as depreciation expense, which will be matched against income

  2. To determine profit for the period
• Prudence Theory

  The business should choose the accounting treatment that least overstates profits and assets
• Prudence Theory

  1. Depreciation is charged as an expense in the statement of financial performance, so that profit is not overstated

  2. Total depreciation to date is recorded as accumulated depreciation and deducted from the cost of the non-current asset in the statement of financial position to reduce net book value of the asset as its usefulness expires over the periods of use
• Consistency Theory


  Once an accounting method is chosen, this method should be applied to all future accounting periods to enable meaningful comparison
• Consistency Theory

  1. Unless there is a change in usage pattern, a business should use the same method of depreciation and rate of depreciation every financial period

  2. To enable meaningful comparison of net book value of non-current assets over time