Definition of 'Expenditure Method'
To calculate depreciation using the expenditure method, you first need to determine the asset's useful life. This can be done by looking at the asset's expected lifespan, the expected number of uses, or the expected level of output.
Once you have determined the asset's useful life, you need to calculate the depreciation rate. The depreciation rate is the percentage of the asset's cost that will be depreciated each year. The depreciation rate is calculated by dividing the asset's cost by its useful life.
To calculate depreciation using the expenditure method, you multiply the asset's cost by the depreciation rate. The result is the amount of depreciation that will be recorded each year.
The expenditure method is a simple and straightforward method of accounting for depreciation. However, it can sometimes result in inaccurate depreciation charges. This is because the assumption that the asset will generate equal amounts of revenue over its useful life is not always accurate.
For example, an asset that is used heavily in the early years of its life will generate more revenue than an asset that is used less heavily. As a result, the expenditure method will result in more depreciation charges being recorded in the early years of the asset's life.
The declining balance method is a variation of the expenditure method that addresses this issue. The declining balance method uses a higher depreciation rate in the early years of the asset's life and a lower depreciation rate in the later years. This results in more depreciation charges being recorded in the early years of the asset's life, which more accurately reflects the asset's declining value.
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