What is depreciation?
submitted by salma begum

Arnold

Depreciation is the way to "expense" assets over a period of time, to recognize that they are being "used up" gradually not all at once when bought. A delivery truck might be depreciated (expensed) over a period of years, for example.

mike d

Depreciation is basically a way of spreading out the cost of an asset over its lifetime. More specifically, spreading the cost over it's "useful life," because it's eventually going to not be very useful, although it might still work.

If your business buys a shiny new computer, you'd get several years out of that, so you wouldn't depreciate that completely in the year you buy it. You'd spread that cost out over several years that you expect it will still be working well. You'd record that amount as an expense. That way, your financial statements better reflect what it's really worth over time.

Part of the point is to match your costs with the revenues they help generate.

Here are the different ways you can do depreciation.

Royce Johnstone

Depreciation is less complex than it might seem at first.

Depreciation is a realistic way of recognizing the value of an asset. That value is generally going to go down as you use the asset. That's what it means for the value to depreciate. Now, in accounting, depreciation is how you recognize that loss of value each year.

If you have a $5,000 asset, it might be worth $4,700 by the second year, $4,200 the third year, and so on. That means if would not be accurate to leave the book value at $5,000, the way it was when it was brand new. You have to find a way to recognize that loss of value, and you that by writing off "depreciation expense" each year.

How do you know how quickly it's going to depreciate? You have to estimate how many years it will be useful, and then use one of several techniques to calculate depreciation.

As an extra, it’s also important for tax purposes because it can reduce your taxable income.