depreciation in accounting

In accounting, depreciation refers to the process of allocating the cost of a tangible fixed asset (like machinery, vehicles, or equipment) over its useful life.

💡 What It Means:

When a business buys a long-term asset, it doesn’t expense the full cost immediately. Instead, it spreads that cost over the asset’s useful life through depreciation.

🔧 Why Depreciation Is Used:

Matching Principle – Expenses should be matched to the revenues they help generate.

Accurate Financial Reporting – Shows a more realistic value of assets on the balance sheet.

Tax Purposes – Reduces taxable income by deducting depreciation.

📘 Key Terms:

Depreciable Asset: A physical (tangible), long-term asset (e.g., buildings, equipment).

Useful Life: The expected time the asset will be productive.

Salvage Value: The estimated residual value of the asset at the end of its useful life.

Depreciable Amount = Cost of Asset − Salvage Value

📉 Common Depreciation Methods:
Method Description Formula
Straight-Line Spreads expense evenly over time (Cost − Salvage Value) ÷ Useful Life
Declining Balance Higher depreciation early on Book Value × Depreciation Rate
Double Declining Balance (DDB) Accelerated method 2 × Straight-Line Rate × Book Value
Units of Production Based on usage (Cost − Salvage) ÷ Total Estimated Units × Units Used
🧾 Example (Straight-Line):

Asset cost: $10,000

Salvage value: $2,000

Useful life: 4 years

Annual Depreciation = (10,000 − 2,000) ÷ 4 = $2,000/year