Depreciation is a method of spreading the cost of an asset over a specified period of time, typically the asset’s useful life. The purpose of depreciation is to match the expense of obtaining an asset to the income it helps a company receives. Depreciation is used for tangible assets, which are physical assets such as manufacturing equipment, business vehicles, and computers. Depreciation is a measure of how much of an asset’s value has been used up at a given point in time. In an economic sense, as used in recasting of statements, a loss in value of a fixed asset as a result of wear and tear or obsolescence, which cannot be corrected by normal repairs. In accountants’ financial statements, an expense item that permits the original cost to be written off against income over the assets’ cost recovery period, as dictated from time to time by the Internal Revenue Service or GAAP. The amount of depreciation taken as a non-cash charge in any given accounting period is almost always based upon number of years approved by the IRS for cost recovery. See Amortization which is the corresponding accounting technique for intangible assets.
- by Kim Mehring