Depreciation is the process in accounting wherein an asset has its value as stated on the accounts deducted across the multiple time periods of its useful lifespan as a depreciation expense in order to represent its declining value as a result of its usage in business activities. The economic age-life method calculates depreciation on the basis of time lapsed in the asset's useful lifespan, but differs from other methods in that it uses effective time.
Depreciation is calculated in each period based on the decrease to the value of the asset from a number of sources, including both obsolescence and wear and tear. All methods use estimation to calculate these sums because a precise assessment would not be useful enough to warrant its cost. The age-life method uses less estimation than most other methods because it requires periodic assessments of the asset.
Useful Lifespan and Residual Value
Before an asset's depreciation expense can be calculated for the period, both its useful lifespan and its residual value upon disposal must be estimated. Both of these parameters can be estimated through examining similar assets placed on the open market once their usefulness has ended and they have been disposed of by their owners.
Effective age is a parameter that is seen in regard to depreciation only in the age-life method. It is an estimate of how much actual wear and tear the asset has incurred through its usage that is described in terms of time. For example, an asset that has a lifespan of 10 years and has been in use for 1 year might be judged to have an effective age of 5 years by an appraiser if its level of wear and tear is high.
Total depreciable value of the asset is calculated by subtracting its residual value upon disposal from the purchase price listed on the accounts. Age-life method then calculates the total accumulated depreciation that the asset should have based on its effective age. For example, if the asset has a useful lifespan of 10 years, an effective age of 5 years, and total depreciable value of $10,000, then the age-life method states that it should have a total accumulated depreciation of $5,000. Once the accumulated depreciation is calculated, the business then records an amount of depreciation expense in that period to bring the recorded accumulated depreciation in line with what it should be. So if the previous accumulated depreciation in this example was $3,000, the depreciation expense for that single period is $2,000.