What is depreciation?
Depreciation refers to the gradual reduction in the value of a tangible asset over time due to wear and tear, obsolescence, or other factors. Depreciation is a non-cash expense, meaning it does not involve an actual outflow of cash, but it is an important accounting concept because it helps to allocate the cost of an asset over its useful life.
the amount by which something, such as a piece of equipment, is reduced in value in a company’s financial accounts, over the period of time it has been in use. The loss in value reduces a company’s profits, and the amount of tax it must pay
In accountancy, depreciation is a term that refers to two aspects of the same concept: first, the actual decrease of fair value of an asset, such as the decrease in value of factory equipment each year as it is used and wear, and second, the allocation in accounting statements of the original cost of the assets to periods in which the assets are used (depreciation with the matching principle).
Depreciation is thus 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. Businesses depreciate long-term assets for both accounting and tax purposes. 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. Generally, the cost is allocated as depreciation expense among the periods in which the asset is expected to be used.
Depreciation is usually calculated using a systematic method that spreads the cost of an asset evenly over its useful life. There are several methods of depreciation, including straight-line, accelerated, and units of production methods. The straight-line method is the simplest and most commonly used method, which spreads the cost of the asset evenly over its useful life. The accelerated methods, such as the declining balance method or the sum-of-years’ digits method, allocate more of the cost to the earlier years of the asset’s life, reflecting the fact that assets often lose their value more rapidly in the earlier years.