Depreciation Period refers to the year on which the depreciation is calculated and the depreciation schedule statement is submitted for each period. In depreciation schedule statement, the opening value is the value of the asset as on the start date of the period. The closing value is the value of the asset as on the end date of the period. The depreciation is calculated for the period for the defined depreciation system.
Depreciation period refers to the length of time over which a fixed asset is expected to generate revenue or be used by a company. It is an estimate of the useful life of the asset and is used to determine the annual depreciation expense that will be recognized in the company’s financial statements.
The depreciation period is typically determined based on several factors, including the type of asset, its expected useful life, and its residual value (i.e. the estimated value of the asset at the end of its useful life). For example, the depreciation period for a building might be 30 years, while the depreciation period for a piece of equipment might be 5 years.
The length of the depreciation period can have a significant impact on a company’s financial statements. A longer depreciation period will result in a lower annual depreciation expense and a higher book value for the asset, while a shorter depreciation period will result in a higher annual depreciation expense and a lower book value for the asset.
It is important for companies to carefully consider the expected useful life of their fixed assets when determining the depreciation period. If the depreciation period is too short, the company may need to replace the asset sooner than anticipated, resulting in unexpected expenses. On the other hand, if the depreciation period is too long, the company may overstate the value of the asset on its balance sheet, which can lead to misleading financial statements.
Overall, the depreciation period is an important factor in determining the accuracy of a company’s financial statements and should be carefully considered when calculating the annual depreciation expense for fixed assets.
For example, if a company purchases a computer for ₹50,000 and expects it to have a useful life of 5 years, it may use a straight-line method to calculate the depreciation expense each year. The depreciation expense would be calculated as follows:
(₹50,000 – Residual value) / Depreciation period = Annual depreciation expense
If the residual value is ₹5,000, the calculation would be:
(₹50,000 – ₹5,000) / 5 = ₹9,000 per year
This means that the company would record a depreciation expense of ₹9,000 each year for the next 5 years until the computer is fully depreciated.