Depreciere

Depreciere is the systematic allocation of the cost of a tangible fixed asset over its estimated useful life. It reflects the wearing out, aging, or obsolescence of the asset rather than a current market value change. In accounting, depreciation is recorded as an expense and reduces the asset’s book value on the balance sheet, while not representing an immediate cash outflow.

Depreciation is a non-cash expense that affects reported profit and may influence tax liabilities, depending on local rules. It does not measure actual market value but rather the consumption of the asset’s economic benefits over time. Estimates that influence depreciation include the asset’s cost, expected useful life, and residual (salvage) value at the end of that life.

Common methods to compute depreciation include straight-line, which allocates an equal amount each year; accelerated methods like declining balance, which expense a larger share early on; and units of production, which ties depreciation to actual usage. The choice of method and the assumptions about useful life and residual value can significantly impact reported earnings.

Tax treatment varies by jurisdiction. Many tax systems allow depreciation or capital allowances for tax purposes, often with specific rates or rules that may differ from financial reporting. Depreciation is distinct from impairment, which tests whether the asset’s recoverable amount has fallen below its carrying value, and from amortization, which applies to intangible assets.