Depreciation
A decrease in value
Depreciation is the accounting process of allocating the cost of a tangible asset over its useful life. It is a method of allocating the cost of an asset to the periods in which it is used and is intended to reflect the decline in the value of the asset due to wear and tear, obsolescence, or any other reason.
There are different methods of calculating depreciation, including straight-line depreciation, accelerated depreciation, and units of production depreciation. Straight-line depreciation is the most common method, where the cost of the asset is divided by the estimated useful life to determine the annual depreciation expense. Accelerated depreciation methods recognize higher expense in the earlier years of the asset’s useful life, while units of production depreciation is based on the amount the asset is used each year.
Depreciation can have tax implications and affect the financial statements of a company. Companies use depreciation to reduce the taxable income in a given year and to determine the book value of an asset on the balance sheet. Depreciation also affects various financial ratios, such as return on assets, and should be considered when making investment decisions.
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