Question

What is depreciation and how does it relate to the matching principle? Is depreciation an exact calculation? If not, what estimates are involved? What happens in the accounting records if we estimate that a car will last for 5 years and it lasts for 7 years?

Answer 1

In Simple words Depreciation means that how much the value of an asset is used. It is the method of accounting to allocate the Asset cost over it's useful life.

Depreciation Expense decrease  the book value of an asset and revenue of the period and this thing serve the purpose of matching concept.

NO, Depreciation is not a exact calculation there is estimation involved which is done by the management.Estimation are as follows

1-That How much will be the useful life of an asset ?

2- What will be salvage value of an asset when that asset is fully depreciated ?

Asset where your estimation get wrong like in this case of CAR .Where we reviewed that car has 2 years extra from estimation .we will change the accounting estimates and do the neccessary changes in accounts .

"REVISED DEPRECIATION CHARGE=CARRYING AMOUNT(AT REVISION DATE)/REMANING USEFUL LIFE"

After getting this Revised depreciation we will charge this depreciation for remaning two years.