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Depreciation definition
Depreciation is an accounting method that spreads the cost of a tangible asset across the years it is expected to be useful. It applies to physical assets such as machinery, vehicles, buildings, equipment, and computers.
Depreciation reflects the steady fall in an asset's value from wear, age, use, or obsolescence. Rather than record the whole cost in the year of purchase, a business charges part of it each period, which lowers accounting profit and taxable income even though no cash leaves the business when the charge is booked.
Depreciation has two terms it is often confused with. Appreciation is the opposite direction, a rise in an asset's value rather than a fall. Amortisation applies the same idea to intangible assets such as patents, software, or goodwill, instead of to a physical asset.
Depreciation Example
A company buys equipment for USD 50,000 and expects to use it for five years. Under straight-line depreciation, the annual charge is:
USD 50,000 √∑ 5 = USD 10,000
The company records USD 10,000 of depreciation expense each year for five years, until the asset's cost is fully written down.
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