Question

Why is depreciation-A method of cost allocation rather than a matter of valuation?

Answer 1

Answer:

Depreciation involves a systematic and rational allocation of cost rather than a process of valuation:

Capital resources are purchased , for use by an association over some stretch of time , The obtainment cost is to be conveyed over the helpful existence of the advantage less rescue esteem if any.

Therefore , depreciation cost is the procedure of allotment of the advantage an incentive as advantage is gotten from the benefit over some stretch of time.

Depreciation estimates the valuation of the advantage got from the benefit over an accounting period as an occasional cost and is in this way not a procedure of valuation.

Thus while both the methods intend to reflect the depreciation in value of the assets over a period of time, the quantum of depreciation varies between the two method since measuring the depreciation of the assets in terms of value is difficult and needs thorough research.

While the depreciation process serves to simply recognise the expense over the estimated economic life of the asset, the valuation method intends to write down the value of the assets to its fair value which may or may not match with the depreciation value recognised under the cost allocation process.