depreciations

Depreciation is the systematic allocation of the cost of a tangible fixed asset over its estimated useful life. It is an accounting concept that reflects wear and tear, obsolescence, and usage, rather than a precise measure of an asset’s current market value. Depreciation is recorded as an expense on the income statement and reduces the asset’s carrying amount on the balance sheet through accumulated depreciation, leaving a net book value.

Key terms include cost (the purchase price and any directly attributable costs), salvage value (the estimated residual value at the end of useful life), useful life (the period over which the asset is expected to be productive), depreciation expense, carrying amount (cost minus accumulated depreciation), and book value (carrying amount excluding any impairment).

Common methods to calculate depreciation include:

- Straight-line: (cost − salvage value) / useful life, yielding equal expense each period.

- Declining balance: a accelerated method using a higher depreciation rate in early years (e.g., double-declining balance).

- Units of production: based on actual usage or output.

- Sum-of-years’ digits: another accelerated method that front-loads depreciation.

Standards and practice vary by jurisdiction. Financial reporting under GAAP and IFRS requires a systematic allocation of cost over useful life, with impairment testing if recoverable amount falls below carrying amount. IFRS often emphasizes component depreciation for major parts, and may permit revaluation for certain asset classes. Tax depreciation, used for tax purposes, frequently employs accelerated methods that differ from financial reporting.

Depreciation is distinct from amortization (intangible assets) and depletion (natural resources). It remains an estimate subject to revision if assumptions about useful life or salvage value change.