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What Is Depreciation In Accounting?
Wed Oct 20, 2021
Table Of Contents:
- What Is Depreciation?
- What Kind Of Assets Can You Depreciate?
- How To Calculate Depreciation?
- Types Of Depreciation
- Why Does Depreciation Matter?
- Frequently Asked Questions
- Conclusion
What Is Depreciation?
Allocation of a one-time expenditure on acquisition/construction of a tangible asset over its estimated useful life. It also refers to the reduction in the valuation of the asset caused by its continuous over a period of time.
What Kind Of Assets Can You Depreciate?
Depreciation can only be allocated to tangible assets (assets that can be seen or touched). For example, plant and machinery, furniture, vehicles, building). Intangible assets like patents and goodwill do not get depreciated but amortized.
How To Calculate Depreciation?
Depreciation amount is dependent on the method used to depreciate an asset. Normally, the asset’s scrap value is subtracted from its purchase cost and divided by its useful life.
Types Of Depreciation
Straight-line Depreciation
It is the most common and easiest type of depreciation used. It is calculated by taking the asset’s scrap value and subtracting it from its purchase cost and dividing it by its useful life. The formula is (asset cost – salvage value) / useful life.
Units Of Production Depreciation
It is a simple way to depreciate a piece of equipment based on how much work it does. The formula is (asset cost – salvage value) / units produced in useful life.
Double Declining Depreciation
It lets you write off more of an asset’s value in the days immediately after you buy it and less later on. It helps businesses that want to recover more of an asset’s value upfront. The formula is (2 x straight-line depreciation rate) x (book value at the beginning of the year).
Why Does Depreciation Matter?
Depreciation allows for companies to recover the cost of an asset when it was purchased. The process allows for companies to cover the total cost of an asset over its lifespan instead of immediately recovering the purchase cost. This allows companies to replace future assets using the appropriate amount of revenue.
Frequently Asked Questions
1. Why is depreciation so important?
Depreciation helps to correctly value an asset at a particular point of time and also helps the owner to recover the money spent on its purchase.
2. What are the methods of depreciation?
There are different methods used by different entities such as straight-line method, double declining method, units of production method, sum of the year’s digits method.
3. Is depreciation good or bad?
Depreciation is good as it helps the owner recover some money spent on the asset and it also helps with certain tax benefits.
4. Why are assets depreciated overtime?
Assets are depreciated over time to depict the true value of the asset as time passes. The efficiency of an asset reduces as it is used continuously and depreciation shows the reduction of the valuation of the asset.
5. What kind of assets can you depreciate?
Depreciation is done only on tangible assets (assets that can be seen or touched) such as vehicles, buildings, furniture and machinery.
Conclusion
So, that's for our introductory blog on “What is depreciation in accounting?”.I hope now all your questions & doubts regarding the term depreciation in accounting have got solved.
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