Depreciation
Explanation: Depreciation is an accounting method of allocating the cost of a tangible asset over its useful life. It represents how much of an asset’s value has been used up. Businesses depreciate long-term assets for both tax and accounting purposes. Different methods of depreciation include straight-line, declining balance, and units of production.
Example: A company purchases machinery for $100,000 with an estimated useful life of 10 years and no salvage value. Using the straight-line method, the annual depreciation expense would be $10,000 ($100,000 / 10 years).
Reference Link: For more information on depreciation, visit Investopedia’s Depreciation.
FAQs:
- Why is depreciation important?
- It helps allocate the cost of an asset over its useful life, matching expenses with revenue and reducing taxable income.
- What are the different methods of depreciation?
- Common methods include straight-line, declining balance, and units of production.
- Can all assets be depreciated?
- Only tangible assets with a useful life of more than one year can be depreciated. Land, for example, is not depreciable.
- How does depreciation affect financial statements?
- Depreciation reduces the book value of assets on the balance sheet and is recorded as an expense on the income statement.
- Is depreciation a cash expense?
- No, depreciation is a non-cash expense; it does not involve actual cash outflow.