Expenditure Method
The expenditure method is one of the four methods used to record depreciation expense. Under this method, depreciation expense is recorded in the period the asset is purchased, rather than over its useful life.
The expenditure method is used primarily for tangible assets, such as equipment and vehicles. It is not commonly used for intangible assets, such as patents or copyrights.
Here are the steps for calculating depreciation expense using the expenditure method:
- Calculate the cost of the asset.
- Subtract the residual value of the asset from the cost of the asset.
- Divide the remaining value by the useful life of the asset.
- This will give you the annual depreciation expense.
For example, if you purchase an asset for $10,000 and its residual value is $2,000 and its useful life is 5 years, the annual depreciation expense would be $1,600.
There are some advantages and disadvantages to using the expenditure method:
Advantages:
- The expenditure method is simple to use and easy to calculate.
- It is consistent with the timing of revenue recognition.
Disadvantages:
- The expenditure method does not provide a consistent pattern of depreciation expense over the asset’s useful life.
- It can be difficult to estimate the residual value of an asset accurately.
The expenditure method is not the most commonly used method for depreciation. However, it can be a useful tool for businesses that need to track depreciation expense on a regular basis.
