Depreciation
Depreciation is the allocation (spreading) of the cost of an asset such as an auto or equipment over its expected useful life. Depreciation represents decrease in worth of most assets belonging to a legal entity over time due to wear and tear and daily use. Short-life assets can immediately be moved to Expenses. On the contrary, land can never be depreciated. The value that is used to depreciate the assets is calculated particularly with special rates set by the tax department. It is usually a percentage of the cost price, less previously calculated depreciation. Depreciation can be claimed as a business expense to reduce income tax.
Definitions
According to College Accounting: A Practical Approach by Slater (13th edition),
- Depreciation. The allocation (spreading) of the cost of an asset such as an auto or equipment over its expected useful life.
According to Financial Management Theory and Practice by Eugene F. Brigham and Michael C. Ehrhardt (13th edition),
- Depreciation. A noncash charge against tangible assets, such as buildings or machines. It is taken for the purpose of showing an asset's estimated dollar cost of the capital equipment used up in the production process.
Key concepts
- Historical cost. The actual cost of an asset at time of purchase.
- Residual value. Estimated value of an asset after all the allowable depreciation has been taken.
- Book value. Cost of equipment less accumulated depreciation.
- Accumulated Depreciation. A contra-asset account that summarizes or accumulates the amount of depreciation that has been taken on an asset.
Related concepts
- Bookkeeping. Recording, filing, and retrieving of financial data, as well as producing those financial reports that are required by laws.
