In accounting, depreciation is a procedure where an asset has its value deducted across its useful lifespan as a depreciation expense in each time period, representing that it is becoming less valuable as it incurs wear and tear through its usage. Most depreciation methods use estimation to calculate depreciation expense because the costs of determining the asset's value once more in each time period are not worth the minor benefits of doing so. The revaluation method calculates depreciation by using this second, less efficient method.
Depreciation represents the decrease in an asset's usefulness through the decrease of its value, culminating in an end to its efficacy and efficiency. Assets tend not to lose value evenly across their lifespans, and most methods other than revaluation tend to model the precise pattern loosely if at all.
Depreciation Using Revaluation
At the end of each time period, the asset is appraised and then assigned a new value based on the appraiser's judgment. Discrepancies between its value in the last and current periods are then deducted as depreciation expense. For example, if an asset valued at $10,000 in the last period but only $8,000 in the current period, then depreciation expense for the current period is $2,000.
Advantages of Revaluation
Revaluation is advantageous in that it needs no other parameters to calculate and in that it produces a more accurate depiction of the pattern in which an asset's value decreases as it is used. Revaluation method requires only that the asset's value be manually reassessed in each period and does not need estimates of either its useful lifespan or residual value upon disposal to calculate depreciation expense.
Disadvantages of Revaluation
Revaluation method is disadvantageous in that its numbers are based on the individual appraiser's opinion rather than any comparatively objective standard of measure such as the market prices that most depreciation methods are based on. Furthermore, revaluation method produces a different depreciation expense in each period of the asset's use even when there should not have been large differences between its use in those periods.
Alan Li started writing in 2008 and has seen his work published in newsletters written for the Cecil Street Community Centre in Toronto. He is a graduate of the finance program at the University of Toronto with a Bachelor of Commerce and has additional accreditation from the Canadian Securities Institute.