What is Depreciation?

Accounting Basics IAS(International Accounting Standards)

What is Depreciation?

Depreciation is an accounting method for allocating a tangible or physical asset’s cost over its useful life or life expectancy. Depreciation is a measure of how much of an asset’s value has been depleted.

Depreciating assets allows businesses to generate revenue while expensing a portion of the asset’s cost each year it is in use. It can have a significant impact on profits if not taken into account.

Long-term assets can be depreciated by businesses for tax and accounting purposes. Companies, for example, can claim a tax deduction for the cost of the asset, lowering taxable income.

Depreciation Types
Depreciating assets using the straight-line technique is the simplest basic method of recording depreciation. It records equal depreciation expense each year for the duration of the asset’s useful life, until the asset is depreciated to its salvage value. Straight-line depreciation was employed in the preceding case.
Depreciation expense = (purchase price – salvage value) / useful life

Double Declining Method: When compared to other depreciation techniques, double-declining-balance depreciation results in a bigger amount expensed in the early years of an asset’s useful life as opposed to the later years. The strategy reflects the concept that assets are often more productive in their early years than in their later years, as well as the practical fact that any asset (like purchasing a car) loses more of its value in the first few years of use. The depreciation factor for the double-declining-balance technique is double that of the straight-line expense method.

Useful life:
The useful life of an asset is an accounting estimate of the number of years it is likely to remain in service for the purpose of generating revenue at the lowest possible cost.

Net book value 
It is the price at which a corporation reports an asset on its balance sheet. It is computed by subtracting the original cost of an asset from the accumulated depreciation, amortization, depletion, or impairment.

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