Reserve For Replacement

A financial provision for recognizing the reduction in value of assets over their estimated useful life. This is done by making regular additions to a fund sufficient to meet the estimated cost of additions to and replacements of the fixed assets when they come to the end of their useful life. The useful life could end due to wear, or becoming obsolete. This reserve is seldom “actually” money set aside for when needed. In concept, the reserve for replacement is similar to the charge for depreciation.