Depreciation

Depreciation is the systematic allocation of the cost of a tangible fixed asset over its useful life. It serves to match the expense of using the asset with the revenue it helps generate and to reflect wear, obsolescence, and aging. Land is not depreciated.

Key elements are cost, residual value (salvage value), and useful life. The asset’s carrying amount is cost minus accumulated depreciation. Common depreciable assets include buildings, machinery, vehicles, and equipment; intangible assets have their own amortization treatment.

Depreciation methods vary. Straight-line depreciation allocates equal annual amounts: (Cost − Salvage Value) divided by Useful Life. Accelerated methods, such as declining balance, take larger amounts in early years. Units of production bases depreciation on actual usage: (Cost − Salvage Value) × (Units this period ÷ Total estimated units). Some standards also permit component depreciation, where major components are depreciated separately.

Regulatory context: For financial reporting, depreciation policies should reflect asset consumption and be consistently applied. In many jurisdictions, tax depreciation rules differ and may allow accelerated write-offs or other allowances.

Journal entries typically record depreciation as Dr Depreciation Expense and Cr Accumulated Depreciation. Over time, depreciation reduces the asset’s carrying amount; impairment or disposal may trigger further adjustments.

Differences between IFRS and GAAP exist in areas such as component depreciation and revaluation; however, both require ongoing assessment of useful life and residual value and disclosure of depreciation methods.