The gradual reduction of an asset's value. It is an expense. but because it is non-cash, it is often effectively a tax write-off ; that is, a person or company usually may reduce his/her/its taxable income by the amount of the depreciation on the asset. Because there are many different ways to account depreciation, it often bears only a rough resemblance to the asset's useful life. This may further benefit the company as they may continue to use the asset tax-free after its value has technically depreciated to nothing. See also: Amortization .
The periodic cost assigned for the reduction in usefulness and value of a long-term tangible asset. Because firms can use several types of depreciation, the amount of depreciation recorded on corporate financial statements may or may not be a good indication of an asset's reduction in value. Depreciation not only affects the asset's value as stated on the balance sheet, it also affects the amount of reported earnings. See also Accelerated Cost Recovery System. accelerated depreciation. accumulated depreciation. recapture of depreciation. straight-line depreciation .
Certain assets, such as buildings and equipment, depreciate, or decline in value, over time.
You can amortize, or write off, the cost of such an asset over its estimated useful life, thereby reducing your taxable income without reducing the cash you have on hand.
(1) In accounting, the process of deducting some portion of the acquisition cost of property over time,as an expense against income,to reflect the fact that the
property is becoming less valuable and will eventually require replacement. One cannot allow a $3,000,000 building to remain on the books for 35 years as an asset at the same value and then,suddenly one year,demol-
ish the building, write off $3,000,000 against income for that particular year, and then construct another building or move. (2) In appraisal, a reduction in the calculations for the reproduction cost of an improvement, in order to arrive at a value of the improvement in its current state, not as it would be if it were reproduced and brand new.
What Does Depreciation Mean?
(1) In accounting, an expense recorded to allocate a tangible asset's cost over its useful life. Because depreciation is a noncash expense, it increases free cash flow while decreasing reported earnings. (2) A decrease in the value of a particular currency relative to other currencies.
Investopedia explains Depreciation
(1) Depreciation is used in accounting to try to match the expense of an asset to the asset's income. For example, if a company buys a piece of equipment for $1 million and expects it to have a useful life of 10 years, it will be depreciated over 10 years. Every accounting year, the company will expense $100,000 (assuming straight-line depreciation, $1 million/10), which will be matched with the money that the equipment helps to make each year. (2) Examples of currency depreciation would be the Russian ruble crisis in 1998, which saw the ruble lose 25% of its value in a single day.