Business, Legal & Accounting Glossary
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.
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.
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.
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 wasnâ€™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.
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This glossary post was last updated: 26th March, 2020