Depreciation, Provisions and Reserves

expenses related to its disposal are estimated at Rs. , . Then its net residual value shall be Rs. , (i.e.

Rs. , – Rs. , ). Depreciable cost of an asset is equal to its cost (as calculated in point .

. above) less net residual value (as calculated in point . . ,) Hence, in the above example, the depreciable cost of machine is Rs.

, (i.e., Rs. , – Rs. , .) It is the depreciable cost, which is distributed and charged as depreciation expense over the estimated useful life of the asset. In the above example, Rs.

, shall be charged as depreciation over a period of years. It is important to mention here that total amount of depreciation charged over the useful life of the asset must be equal to the depreciable cost. If total amount of depreciation charged is less than the depreciable cost then the capital expenditure is under recovered. It violates the principle of proper matching of revenue and expense.

. . Estimated Useful Life Useful life of an asset is the estimated economic or commercial life of the asset. Physical life is not important for this purpose because an asset may still exist physically but may not be capable of commercially viable production.