Depreciation
Accounting method for allocating asset cost over useful life.
Last updated
Depreciation in accountancy covers both an actual reduction in an asset's fair value and the allocation of its original cost over the periods it is used.[1] Depreciation is an allocation process, not a method for determining an asset's worth, though it does influence the carrying amount shown on the balance sheet.[2] Because depreciation expense involves no immediate cash payment, it is categorized as a noncash expense.[3][4]
Quick Facts
- Field
- Accountancy
- Known for
- Concept of allocating cost of tangible assets over useful life
- Related concepts
- Depletion
- amortization
- impairment
Facts from the source article.
Key facts and history
Generally, this involves four criteria: cost of the asset, expected salvage value, estimated useful life, and a method of apportioning cost over that life.[5] Cost generally is the amount paid for the asset, including all costs related to acquiring and bringing it into use.[6] Depreciation expense is added back on the statement of cash flows to reconcile net income with cash from operations.[3][4] When an asset is anticipated to provide future economic benefits, a portion of its cost must be postponed as a deferred cost instead of being expensed immediately.[5]
In financial reporting, the business allocates such costs to the current period as depreciation expense, following a rational and systematic approach.[5] The straight-line approach is the most straightforward and frequently employed depreciation technique.[7] Under the double-declining-balance method, an accelerated depreciation rate is applied to the asset's remaining undepreciated balance, especially in the early years of its life.[8] If an asset's value drops unexpectedly, accounting standards mandate the recognition of an impairment charge.[9]
What the cited sources add
The Corporate Finance Institute states that straight-line depreciation uniformly reduces an asset's value over each period until it reaches salvage value.[10] The same source notes that the double-declining balance method results in higher depreciation expenses early in an asset's life and lower expenses later.[10] The AccountingCoach source clarifies that depreciation expense is a noncash expense and does not provide a source of cash, though it reduces taxable income.[4] The reducing balance method, as described by moneyterms.co.uk, weights depreciation more heavily toward early years compared to straight line.[11]
Bench Accounting also describes the sum-of-the-year's-digits method, which lets a business depreciate more cost in early years and less later.[12] According to Bench Accounting, for tax purposes, assets are grouped into classes, and each class is assigned a specific useful life.[12]
References
- Wikipedia, "Depreciation" (CC BY-SA 4.0), which cites: Raymond H. Peterson, Accounting for Fixed Assets, John Wiley and Sons, Inc., 2002 (original not read by us) en.wikipedia.org
- Wikipedia, "Depreciation" (CC BY-SA 4.0), which cites: ASC 360-10-35-4. (original not read by us) en.wikipedia.org
- Wikipedia, "Depreciation" (CC BY-SA 4.0), which cites: "Is depreciation a source of funds? AccountingCoach", AccountingCoach.com (we also read that source) en.wikipedia.org
- "Is depreciation a source of funds? AccountingCoach", AccountingCoach.com. facts only, no text reused. accountingcoach.com
- Wikipedia, "Depreciation" (CC BY-SA 4.0), which cites: Kiesco, et al, p. 521. See also Walther, Larry, Principles of Accounting Chapter 10 . (original not read by us) en.wikipedia.org
- Wikipedia, "Depreciation" (CC BY-SA 4.0), which cites: An allocation of costs may be required where multiple assets are acquired in a single transaction. Purchase price allocation may be required where assets are ac (original not read by us) en.wikipedia.org
- Wikipedia, "Depreciation" (CC BY-SA 4.0), which cites: "Straight Line Depreciation", Corporate Finance Institute; "Straight Line Depreciation Method Explanation & Examples" (we also read that source) en.wikipedia.org
- Wikipedia, "Depreciation" (CC BY-SA 4.0), which cites: Pietersz, G., Reducing balance, moneyterms.co.uk, accessed 16 December 2023 (we also read that source) en.wikipedia.org
- Wikipedia, "Depreciation" (CC BY-SA 4.0), which cites: A charge for such impairment is referred to in Germany as depreciation. (original not read by us) en.wikipedia.org
- "Straight Line Depreciation", Corporate Finance Institute. facts only, no text reused. corporatefinanceinstitute.com
- Pietersz, G., Reducing balance, moneyterms.co.uk, accessed 16 December 2023. facts only, no text reused. moneyterms.co.uk
- "What is Depreciation? And How do You Calculate It? | Bench Accounting". facts only, no text reused. bench.co
Each numbered sentence above was checked against the source it cites before publication. Sentences citing Wikipedia adapt text from the English Wikipedia article Depreciation (contributors), used under CC BY-SA 4.0; this entry is available under the same licence. Other sources were used for facts only; no text or images are copied from them.
More in Economic Concepts & Models
Sources
Compiled from Wikipedia and the sources listed below. Text from Wikipedia is available under CC BY-SA 4.0; this entry is adapted from it.
- Wikipedia: Depreciation (CC BY-SA 4.0).
Spotted an error? Know more?
Reader corrections go straight into our review queue. Suggest an edit · How this site is sourced