Depreciation

Business, Legal & Accounting Glossary

Definition: Depreciation


Depreciation

Quick Summary of Depreciation


Depreciation is an economic term that refers to the decline in the value of assets through the passage of time. This is in account of the wear and tear, depletion, obsolescence and other factors that occur through the usage of the asset. The depreciation cost of the asset is spread over the period of time during which it is used. The depreciation cost is a non-cash expense which reduces the company’s reported earnings although the free cash flow of the company increases.

Depreciation is a process of accounting, where the expense of the asset is adjusted against the income generated by the owner of the asset. For example, the company with equipment of $1 million and a life of 10 years would expend $ 100,000 as its depreciation cost every year. This cost will be matched with the income generated by the equipment in the 10 years it serves the owner.

Depreciation also refers to the fall in the value of a currency when compared with the other currencies. For example, the US dollar depreciates as against the Indian rupee. In such a case, to obtain goods and services valued to the original amount of Indian rupee prior to the depreciation, the purchasers would have to pay more US dollars.



Video Guide For Depreciation




What is the dictionary definition of Depreciation?

Dictionary Definition


The recognition of part of an asset’s cost as an expense during each year of its useful life. This expense can be calculated either by straight-line depreciation (the same dollar amount is assigned to each year) or by one of several accelerated methods in which the dollar amounts are weighted and/or cumulative.

  1. The state of being depreciated.
  2. The decline in value of assets.
  3. accounting The measurement of the decline in value of assets. Not to be confused with impairment, which is the measurement of an unplanned, extraordinary decline in the value of assets.

n. the actual or theoretical gradual loss of value of an asset (particularly business equipment or buildings) through increasing age, natural wear and tear, or deterioration, even though the item may retain or even increase its replacement value due to inflation. Depreciation may be used as a business deduction for income tax reduction, spread out over the expected useful life of the asset (straight line) or at a higher rate in the early years of use (accelerated).


Full Definition of Depreciation


Definition 1

A noncash expense that reduces the value of an asset as a result of wear and tear, age, or obsolescence. Most assets lose their value over time (in other words, they depreciate), and must be replaced once the end of their useful life is reached. There are several accounting methods that are used in order to write off an asset’s depreciation cost over the period of its useful life. Because it is a non-cash expense, depreciation lowers the company’s reported earnings while increasing free cash flow.

Definition 2

A decline in the value of a given currency in comparison with other currencies. For instance, if the U.S. dollar depreciates against the Euro, buyers would have to pay more dollars in order to obtain the original amount of euros before depreciation occurred.

Depreciation is the reduction in the value of an asset from wear-and-tear or obsolescence. Depreciation allowance encourages companies to invest in new equipment. For accountants, it gives a proper match of the cost of using the asset to the current revenues by a periodic allocation of the original cost to expenses over the life of the asset. Historic cost depreciation is based on the original cost. Replacement cost depreciation is the actual cost to currently replace the asset. Depreciable cost is the difference between the original cost and salvage value of the asset. Straight-line depreciation divides depreciable cost equally over the asset’s useful life. Units-of-production depreciation matches cost to output using the cost per unit of production. Accelerated depreciation produces larger deductions for depreciation in the early years of life and includes (1) Sum-of-years digits method where depreciable cost is multiplied by the number of years remaining and divided by the sum of all the digits in the number of years in the asset’s life, and (2) Double declining method where the depreciation rate is double that of straight-line depreciation.

For example, if a machine will completely wear out after ten year’s use, the cost of the machine is charged as an expense over the ten-year life rather than all at once, when the machine is purchased. Straight-line depreciation charges the same amount to expense each year. Accelerated depreciation charges more to expense in the early years, less in later years. Depreciation is an accounting expense. In real life, the fixed asset may grow in value or it may become worthless long before the depreciation period ends.


Examples of Depreciation in a sentence


They wrote off over £600 due to depreciation of the machinery.
It’s important to account for depreciation when calculating the costs.
Depreciation accounting is a technique used to allocate the cost of a capital asset over its expected useful life.
There are special rules concerning the depreciation of real estate.
There was so much depreciation on the car in its first year that it wasn’t worth trading in for a newer model.
The depreciation of the dollar makes the United States a travel and shopping destination for many Europeans.


Synonyms For Depreciation


devaluation, disparagement, wear and tear, derogation, cushioning


Related Phrases


accelerated depreciation,
declining-balance method
Accelerated Cost Recovery System
Modified ACRS
double-declining balance depreciation method
Net Domestic Product
pre-depreciation profit
straight-line depreciation
Sum-of-the-Years'-Digits Method
declining balance depreciation
sum of the years digits (SYD) depreciation
double declining-balance depreciation
salvage value
units-of-output depreciation


Depreciation FAQ's


How to Depreciate an Investment

Depreciation is the income tax procedure that allows you to deduct the cost of an asset with a long period of usage. The property type determines the number of depreciation years, which is called the recovery period. In addition to assets used in business, investment property that produces income is depreciated. However, no depreciation is allowed on land or securities held for investment. Instead, depreciable investment property deteriorates from wear and tear, such as rented real estate or equipment.

Step 1
Determine the depreciation table to use for your investment property by examining the MACRS Percentage Table Guide in Appendix A of IRS Publication 946. The row for General Depreciation System (GDS) applies unless your property is listed on page 34 of Publication 946 requiring use of the Alternative Depreciation System (ADS). The applicable recovery period is based upon the property descriptions on page 35.

Step 2
Locate the correct depreciation table in Appendix A of Publication 946.

Step 3
Identity the percentage to depreciate by using the row on the depreciation table corresponding to the ownership year for which depreciation is calculated. Depending upon the table, the column is either the recovery period for the property type or the month of the first year the property was used for investment purposes.

Step 4
Multiply the percentage to depreciate by your cost for the investment property. This is the tax-deductible depreciation expense for the year.

Step 5
Record the depreciation expense on the tax form reporting your income from the investment.

Tips & Warnings
The depreciation for improvements to an investment property is calculated separately from general depreciation.
Things Needed
Internal Revenue Service Publication 946


Cite Term


To help you cite our definitions in your bibliography, here is the proper citation layout for the three major formatting styles, with all of the relevant information filled in.

Page URL
https://payrollheaven.com/define/depreciation/
Modern Language Association (MLA):
Depreciation. PayrollHeaven.com. Payroll & Accounting Heaven Ltd.
August 16, 2022 https://payrollheaven.com/define/depreciation/.
Chicago Manual of Style (CMS):
Depreciation. PayrollHeaven.com. Payroll & Accounting Heaven Ltd.
https://payrollheaven.com/define/depreciation/ (accessed: August 16, 2022).
American Psychological Association (APA):
Depreciation. PayrollHeaven.com. Retrieved August 16, 2022
, from PayrollHeaven.com website: https://payrollheaven.com/define/depreciation/

Definition Sources


Definitions for Depreciation are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 26th November, 2021 | 0 Views.