Depreciation is an accounting method used to allocate the cost of a tangible or physical asset over its useful life. It represents the estimated reduction in value of a fixed asset within a fiscal year. Depreciation is the decrease in the value of assets and the method used to reallocate, or "write down" the cost of a tangible asset (such as equipment) over its useful life span. The decrease in value of the asset affects the balance sheet of a business or entity, and the method of depreciating the asset, accounting-wise, affects the net income, and thus the income statement that they report.
Here are some key points about depreciation:
- Depreciation is the process of deducting the total cost of something expensive you bought for your business over a certain period of time.
- Depreciation allows companies to earn revenue from the assets they own by paying for them over a certain period of time.
- Depreciation can be compared with amortization, which accounts for the change in value over time of intangible assets.
- There are many types of depreciation, including straight-line and various forms of accelerated depreciation.
- The number of years over which you depreciate something is determined by its useful life.
- Accounting standards do not allow us to expense the entire value of the asset in the year they are purchased because their value is derived over a longer period of time—called their expected useful life.
- Depreciation is an accounting method for estimating that decline over time. It helps businesses match their revenues.
In summary, depreciation is an accounting method used to allocate the cost of a tangible asset over its useful life. It allows businesses to earn revenue from the assets they own by paying for them over a certain period of time. Depreciation affects the balance sheet of a business or entity, and the method of depreciating the asset, accounting-wise, affects the net income, and thus the income statement that they report.
