What is Depreciation?
Depreciation
is the systematic allocation of the depreciable amount of an assets over its
useful life. The depreciable amount is determined after deducting its residual
value. The following four factors are considered in determining the useful life
of an assets:
- Expected use of assets.
- Expected physical wear and tear.
- Technical or commercial obsolescence arising from changes or improvements in production or from a change in the market demand for the product or service output of the assets.
- Legal or similar limit on the use of assets, such as the expiry dates of related leases.
To
calculate the depreciation amount, we shall select correct depreciation method based
on the nature of an organization. Expected future economic benefit of the
assets used by entity should be reflected by the depreciation method used by
the entity. Different depreciation methods can be used to allocate the
depreciable amount of an assets on a systematic basis over its useful life.
However, Nepal Accounting Standard (NAS) suggests three method to depreciate
assets on systematic basis namely: Straight Line Method, Diminishing Balance
Method and Units of Production Method. The entity shall select the method that
most closely reflects, the expected pattern of consumption of the asset embodying
economic benefit. [Source: Nepal
Accounting Standard (NAS)]
