Property, plant and equipment schedules template includes a line named as \u201cDepreciation charge\u201d. You may also have seen \u201cAmortization\u201d and simple \u201cDepreciation\u201d used. The meaning stays the same, so there\u2019s really no difference in terms of which to use, but the questions \u201cWhat this depreciation is?\u201d still remains. So with this post I\u2019ll try to answer to this very same question.<\/p>\n
As mentioned in one of our previous posts about property, plant and equipment, with the initial recognition management gives an estimated useful life to an asset. In addition to useful life certain assets may in the eyes of management have a residual value, which can be collected from disposal of the asset. Usually such residual value is applicable in case of buildings or large machinery in which case the residual value is material to the financial statements. On lot of cases say for an example from disposal of a computer that operates you may collect some proceeds; however estimating them is really inefficient and not always precise. So, we have determined the estimated useful life and say the residual value as well. What happens next?
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\nThe difference between cost and residual value is called the \u201cdepreciable amount\u201d. This depreciable amount is next depreciated on a systematic basis over its useful life. Let\u2019s say for an example that we have an asset that costs 10,000 USD and the residual value is determined as 1,000 USD. The depreciable amount is hence 9,000 USD. Since we have also determined that the useful life of this asset is 10 years, our annual depreciation in case of linear method of depreciation is 900 USD. Note however that the method of depreciation should reflect the pattern in which the economic benefits are expected to be consumed. It may very well be that over the first years the depreciation charge is more progressive since more is produced. When the capacity decreases, the depreciation rate should also decrease.<\/p>\n
The useful lives, method of depreciation, capacities of economic benefits and residual values should obviously be revisited and reviewed at least once a year and revised in case expectations differ significantly from previous estimates. The depreciation charge as mentioned in our previous post should be adjusted for current and future periods. No adjustments should be done to prior periods.<\/p>\n
Hopefully you now understand the line \u201cDepreciation charge\u201d disclosed in the Property, plant and equipment schedules template. If the company has more assets than merely land, the line is always disclosed in the schedule.<\/p>\n