Depreciation
Quick Answer
Depreciation is the systematic allocation of the cost of a tangible asset over its useful life, reflecting the asset's gradual wear and tear, obsolescence, or decline in value.
Definition
Depreciation is the systematic allocation of the cost of a tangible asset over its useful life, reflecting the asset's gradual wear and tear, obsolescence, or decline in value.
Explanation
Depreciation allows businesses to spread the cost of major assets over their useful lives, matching the expense with the revenue the asset generates. Common methods include straight-line (equal annual amounts), declining balance (higher early years), and units of production (based on usage).
Depreciation is a non-cash expense that reduces taxable income and reported earnings. It's important for tax planning and for accurately representing asset values on the balance sheet.
Example
A company buys a delivery truck for $50,000 with a 5-year useful life. Using straight-line depreciation, the annual depreciation expense is $10,000 per year.
Frequently Asked Questions
What is Depreciation?
Depreciation is the systematic allocation of the cost of a tangible asset over its useful life, reflecting the asset's gradual wear and tear, obsolescence, or decline in value.
How does Depreciation work?
Depreciation allows businesses to spread the cost of major assets over their useful lives, matching the expense with the revenue the asset generates. Common methods include straight-line (equal annual amounts), declining balance (higher early years), and units of production (based on usage).Depreciation is a non-cash expense that reduces taxable income and reported earnings. It's important for tax planning and for accurately representing asset values on the balance sheet.
Can you give an example of Depreciation?
A company buys a delivery truck for $50,000 with a 5-year useful life. Using straight-line depreciation, the annual depreciation expense is $10,000 per year.