In accountancy, depreciation refers to two aspects of the same concept...
The method of allocating the cost of a tangible asset over the life it will remain useful is called depreciation. In accounting, depreciation also refers to the decreasing value of the cost of the asset over time.
Businesses deprecate their long term assets for accounting, and taxation purposes. The former affects the net income that is reported by the businesses, and the latter affects the balance sheet of the entity or the business. The cost is allocated as an expense, called the depreciation expense, over the periods in which the asset is expected to remain in use. The depreciation expense is a recognized form of expense because of the business reporting purposes, as well as, for the payment of taxes.
There are a number of methods that can be used to calculate depreciation. Generally, calculating depreciation is based on the level of activity of the asset (its usage), and the passage of time. The two main methods of calculating depreciation are:
Each method has its own way of calculations, and list of assets that can be depreciated using it. Depreciation is a wide phenomenon and an important part of the taxation, and financial reporting of businesses.
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