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However, there are assets whose usage is connected with the time in a different way. It
includes the right to use assets which have a legal life fixed in terms of years. Once the
years elapse, such assets are considered to have been depreciated. The term amortisation
is applied instead of depreciation in those assets whose usage is connected with time.

Exercise 7.2
FOR ONLINE READING ONLY
1. Write short notes on the following terms:
(a) Residual value,
(b) Depreciable amount,
(c) Useful life, and
LANGUAGE EDITING
(d) Carrying amount.
2. How would you effectively showcase your ability by explaining the correlation
between the depreciation of Property, Plant, and Equipment (PPE) and the application
of the matching concept in financial reporting
3. Demonstrate your proficiency with asset management and legal rules by giving
examples of three different asset categories whose lawful usage is limited to
particular time periods?

Methods for estimation and accounting for depreciation
There are various methods that can be adopted to charge depreciation of an asset. These
methods include, but not limited to, the straight-line method, the diminishing balance
method and the units of production and sum of years digits method. However, the choice
of a depreciation method will depend on the pattern in which an asset is used or it is
expected to be used to generate future economic benefits over its useful life. Once a
certain method is opted it has to be applied consistently from time to time, unless there
is a change in the expected pattern of those future economic benefits.

Straight-line Method

Straight-line method of depreciation is the method which results into a constant depreciation
charge over the useful life provided that residual value of an asset does not change. It
is calculated as a fixed amount or fixed percentage of the depreciable value of the asset.

Student’s Book Form Five
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