Concepts
Involved in Depreciation
There
are a couple of concepts that you need to tackle
before looking at depreciation methods. These
are the concepts of useful life and salvage
value.
Useful life
Useful life is an estimation of how long an asset will be used by the
company before it is useless and must be thrown away
or sold. For tax purposes, each category (or class)
of asset has its own estimation of useful life. The
useful life of a building is much greater than the
useful life of a computer software program. For
accounting purposes, it is generally easier to use
the same basis of depreciation as the tax
authorities use; otherwise, you will be reconciling
the two every year end. Check with your accountant
on the tax rules in your country.
Salvage value
Salvage
value is established when the asset is purchased. It
is an estimate of the value (if any) of the asset at
the end of its useful life with the company. For
example, a truck may be useful to the company for
five years, at which point the owner expects to sell
it for $7,500. That would be its salvage value.
Depreciation - Useful Life and
Salvage Value