Depreciation

Depreciation indicates the decline in asset value over its useful life, reflecting wear and tear, technical obsolescence, or shifts in market demand. Accountants apply methods—like straight-line or reducing-balance—to systematically write down the asset’s book cost across set periods. This approach acknowledges that items degrade or become outdated, necessitating updates or replacements eventually.

Key Points

• Expense Allocation: Depreciation spreads the purchase outlay over relevant years.
• Tax Treatment: Rules often permit deducting depreciation to reduce taxable profit.
• Long-Term Planning: Signals equipment renewal timelines and budget for refresh cycles.
• Non-Cash Expense: It’s an accounting concept, not actual outflow, yet influences net earnings.

By recognizing depreciation, businesses track accurate net asset worth and ensure prudent resource management, avoiding illusions of constant valuations in dynamic operational contexts.