What is Depreciation ?

Depreciation is the decrease in value of an asset over time due to wear and tear or obsolescence.

The Companies Act of 2013 states that “depreciation is the systematic allocation of an asset’s depreciable amount throughout the course of its useful life.” The cost of the asset or a different amount used to replace the cost, less the asset’s residual value, is the depreciable amount of the asset.

It is an accounting technique for spreading out the expense of a tangible item over the course of that asset’s useful life. It shows how much of an asset’s worth has been expended. By paying for assets over a predetermined length of time, it enables businesses to generate income from the assets they own.

The immediate cost of ownership is substantially lower because businesses don’t have to fully account for them in the year the assets are bought. The earnings of a corporation might be significantly impacted if it is not taken into consideration. Long-term assets may also be depreciated by businesses for tax and accounting reasons.

It is comparable to amortization, which takes into account the change in value of intangible assets over time.

Determining an asset’s book value is based on a variety of calculations, and there are numerous types of depreciation expense.

The following are the most typical depreciation techniques:

Double the decreasing balance
Units of production
Sum of the years’ digits