Additional Resources

  1. The Measurement Of Economic Depreciation [econweb.umd.edu]
  2. 4-1 Engineering Economics [valpo.edu]
  3. Engineering Economic Analysis [cpp.edu]
  4. Depreciation And Depletion [web.cemr.wvu.edu]
  5. Principles Of Macroeconomics: Section 14 Main [colorado.edu]
  6. Principles Of Macroeconomics: Section 15 Main [colorado.edu]

Definition

In accountancy, depreciation refers to two aspects of the same concept...

Depreciation

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.

More about Depreciation

  1. For the purposes of accounting, depreciation includes the value of the assets that has been used till date. For the purpose of tax, businesses can reduce the cost that the tangible asset they have purchased by showing it as an expense. However, it is important that the businesses depreciate theses tangible assets according to the rules specified by IRS. The deductions depend on the kind of asset, and the time it is expected to last. It is used in accounting in a bid to match the expense that was caused by buying the asset, and the income that the asset is helping the business make.
  2. Two examples of asset that lose their value or depreciate over time are real estate and currency. During the infamous ruble crisis in Russia in 1998, about 25% of the value of ruble was lost in a single day. Similarly, in Las Vegas, the home owners saw the value of their houses depreciate by 50% during the housing crisis that happened in 2008.

Calculating Depreciation

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:

  1. Straight line method
  2. Double declining method

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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