Depreciation

What is Depreciation?

Depreciation is the accounting process of allocating the cost of a tangible asset over its useful life. It represents the decrease in value of an asset over time due to usage, wear and tear, or obsolescence, and it is used to spread the initial cost of an asset across its expected service years.

Short Description: The process of allocating the cost of a tangible asset over its useful life.

• Straight Line Method: Distributes equal depreciation expense each year over the useful life of the asset.
• Declining Balance Method: Accelerates depreciation charges by applying a constant rate to the declining book value.
• Units of Production Method: Allocates depreciation based on the asset’s usage or output during the period.

Depreciation is critical in financial reporting as it impacts profit calculations, tax liabilities, and provides a more accurate representation of an asset's value on the balance sheet.