DEFINITION of 'Depreciation'

1. A method of allocating the cost of a tangible asset over its useful life. Businesses depreciate long-term assets for both tax and accounting purposes.

2. A decrease in an asset's value caused by unfavorable market conditions.


Loading the player...

BREAKING DOWN 'Depreciation'

1. For accounting purposes, depreciation indicates how much of an asset's value has been used up. For tax purposes, businesses can deduct the cost of the tangible assets they purchase as business expenses; however, businesses must depreciate these assets in accordance with IRS rules about how and when the deduction may be taken based on what the asset is and how long it will last.

Depreciation is used in accounting to try to match the expense of an asset to the income that the asset helps the company earn. For example, if a company buys a piece of equipment for $1 million and expects it to have a useful life of 10 years, it will be depreciated over 10 years. Every accounting year, the company will expense $100,000 (assuming straight-line depreciation), which will be matched with the money that the equipment helps to make each year.

2. Currency and real estate are two examples of assets that can depreciate or lose value. During the infamous Russian ruble crisis in 1998, the ruble lost 25% of its value in one day. During the housing crisis of 2008, homeowners in the hardest-hit areas, such as Las Vegas, saw the value of their homes depreciate by as much as 50%.

There's more to depreciation than just the definition - Read more on Introduction to Depreciation and Depreciation: Straight-Line Vs. Double-Declining Methods.

  1. Amortization

    1. The paying off of debt in regular installments over a period ...
  2. Depreciation, Depletion and Amortization ...

    A method of accounting associated with the acquisition, exploration ...
  3. Economic Life

    The expected period of time during which an asset is useful to ...
  4. Appraisal Method Of Depreciation

    A form of depreciation calculation that is based upon appraisal ...
  5. Economic Depreciation

    A measure of the decrease in value of an asset over a specific ...
  6. EBITDA - Earnings Before Interest, ...

    Learn what EBITDA is, watch a short video to learn more and with ...
Related Articles
  1. Active Trading

    An Introduction To Depreciation

    Companies make choices and assumptions in calculating depreciation, and you need to know how these affect the bottom line.
  2. Stock Analysis

    The 5 Best Dividend Stocks in the Energy Sector

    Learn about the top five dividend companies that operate in energy-related industries that explore, develop, drill, extract and transport energy sources.
  3. Markets

    A Clear Look At EBITDA

    This measure has its benefits, but it can also present earnings through rose-colored glasses.
  4. Personal Finance

    Breaking Down The Balance Sheet

    Knowing what the company's financial statements mean will help you to analyze your investments.
  5. Forex Education

    Depreciation: Straight-Line Vs. Double-Declining Methods

    Appreciate the different methods used to describe how book value is "used up".
  6. Economics

    GAAP And The IFRS Standards Convergence Efforts In 3 Substantial Areas

    Understand the specific steps that have been taken in hopes of converging the GAAP and the IFRS accounting standards, despite the philosophically and culturally based methodological differences ...
  7. Professionals

    The Impact Of Combining The U.S. GAAP And IFRS

    The convergence of accounting standards is changing the attitudes of CPAs and CFOs toward harmonization of international accounting.
  8. Investing


    Amortization and depreciation are two ways to prorate the cost of an asset's life. Learn more about the latter and how it it's calculated.
  9. Investing Basics

    How To Evaluate A Company's Balance Sheet

    Asset performance shows how what a company owes and owns affects its investment quality.
  10. Professionals

    Financial History: The Rise Of Modern Accounting

    Find out how these two have grown hand-in-hand throughout our modern history.
  1. What is the difference between adjusted and regular funds from operations?

    While regular funds from operations measures the cash flow generated by the operations of a real estate investment trust ... Read Full Answer >>
  2. How do you calculate GDP with the income approach?

    The income approach to measuring gross domestic product (GDP) is based on the accounting reality that all expenditures in ... Read Full Answer >>
  3. What metrics can be used to analyze a telecommunications company if they have very ...

    Telecommunications companies play a very crucial role in the economy by providing access to voice, text, video and other ... Read Full Answer >>
  4. What happens to the US dollar during a trade deficit?

    During a trade deficit, the U.S. dollar generally weakens. Of course, there are numerous inputs that determine currency movements ... Read Full Answer >>
  5. What key requirements must be met for the IRS to classify changes or alterations ...

    Qualified leasehold improvement refers to improvement that is done to the interior of a non-residential building by a person ... Read Full Answer >>
  6. Is Net Operating Income (NOI) the same thing as Earnings Before Interest and Taxes ...

    Net operating income (NOI) determines a property's revenue less all necessary operating expenses. NOI does not take into ... Read Full Answer >>
  7. What types of financial margins should investors pay the most attention to before ...

    The most widely used financial margins are calculated based on income statements and include metrics such as gross profit ... Read Full Answer >>
  8. What are the primary benchmarks that track the electronics sector?

    Some of the main benchmarks that track the electronics sector are the book-to-bill ratio, cash flow-to-debt ratio, debt-to-capital ... Read Full Answer >>
  9. How is the economic order quantity model used in inventory management?

    The economic order quantity model is used in inventory management by calculating the number of units a company should add ... Read Full Answer >>
  10. What is the justification for allowing deferred tax liabilities?

    A deferred tax liability tracks the temporary difference that arises between a company's income taxes that will be due in ... Read Full Answer >>
  11. What is a deferred tax liability?

    A deferred tax liability is an account that is listed on a company's balance sheet and occurs when its taxable income is ... Read Full Answer >>
  12. Which has performed better historically, the stock market or real estate?

    For the majority of U.S. history – or at least as far back as reliable information goes – housing prices have increased only ... Read Full Answer >>
  13. What is an aggregate limit and what type of insurance is it usually associated with?

    Tangible assets can be liquidated and turned into cash, if necessary. In high-risk industries or high-risk business situations, ... Read Full Answer >>
  14. How can I calculate the Macaulay duration of a zero-coupon bond?

    The funds from operations is a measure of the amount of cash flow that a business's operations generates. Real estate investment ... Read Full Answer >>
  15. Which consumer goods do Americans buy the most of?

    A tangible asset is any asset with a physical form, and includes fixed assets such as machinery, land and buildings. Tangible ... Read Full Answer >>
  16. How does a master limited partnership (MLP) differ from other business structures?

    The master limited partnership (MLP) is a unique hybrid legal structure that combines elements of a partnership with elements ... Read Full Answer >>
  17. Which financial statement can I find noncurrent assets on?

    The value of a company's noncurrent assets is located on its balance sheet. Noncurrent assets are a company's resources that ... Read Full Answer >>
  18. Are noncurrent assets depreciated?

    Depreciation is an accounting method that allocates a tangible asset's cost over its life. Companies usually depreciate noncurrent, ... Read Full Answer >>
  19. How is depreciation related to the carrying value of a tangible asset?

    Depreciation is related to the carrying value of a tangible asset in that the latter is the original cost of the tangible ... Read Full Answer >>
  20. Why does accumulated depreciation have a credit balance on the balance sheet?

    Accumulated depreciation is increased with a credit entry, although it is shown on the asset side of the balance sheet. Following ... Read Full Answer >>
  21. What is an adjusted cost basis and how is it calculated?

    The cost basis of an investment or asset is an important consideration in tax planning for individual investors, business ... Read Full Answer >>
  22. How is salvage value used in depreciation calculations?

    When calculating depreciation, an asset's salvage value is subtracted from its initial cost to determine total depreciation ... Read Full Answer >>
  23. What are the most common operating expenses for an online business?

    Online businesses differ in operating needs and expenses but incur many of the same costs that other businesses do. Calculating ... Read Full Answer >>
  24. What are some examples of fixed assets?

    A fixed asset is an accounting term used to represent a long-term asset a firm purchases and uses for its production of goods, ... Read Full Answer >>
  25. What are the different ways to calculate depreciation for tangible assets?

    Depreciation is a method used to allocate the cost of a company's tangible assets over the assets' useful life. In other ... Read Full Answer >>
  26. How do I calculate fixed asset depreciation using Excel?

    Depreciation is a method that allocates the cost of a company's fixed assets over the assets' useful life. In other words, ... Read Full Answer >>
  27. What is the difference between current assets and fixed assets?

    Current assets, or short-term assets, are assets that can be converted into cash within one fiscal year or one operating ... Read Full Answer >>
  28. What is the tax impact of calculating depreciation?

    Depreciation, which is the decrease in the value of an asset or assets, reduces the amount of taxes paid in the form of depreciation ... Read Full Answer >>
  29. What is the difference between Operating Cash Flow and Net Operating Income (NOI)?

    Two metrics that investors look at in a company's financial statements are its net operating income and operating cash flow. ... Read Full Answer >>
  30. What are the different ways to calculate depreciation?

    In the United States, accountants have to follow generally accepted accounting principles (GAAP) to calculate and report ... Read Full Answer >>
  31. How does inflation affect fixed-income investments?

    Inflation is typically defined as a sustained increase in the price level of goods and services. There is no widespread consensus ... Read Full Answer >>
  32. Why is it that under some circumstances, capital expenditure cannot be tax-deducted ...

    Current tax laws do not allow the vast majority of capital expenditures to be fully tax-deducted for the year in which the ... Read Full Answer >>
  33. Why are capital expenses (CAPEX) treated differently than current expenses?

    Current expenses are the necessary purchases that keep your business going from day to day such as rent, utility bills and ... Read Full Answer >>
  34. Does a capital expenditure (CAPEX) immediately affect income statements?

    A capital expenditure, or CAPEX, is considered an investment into the business. The money spent is not immediately reported ... Read Full Answer >>
  35. Can real estate be depreciated?

    Investors are able to depreciate rental real estate and track the expenses of generating income to save money on their federal ... Read Full Answer >>
  36. What is the difference between amortization and depreciation?

    Because very few assets last forever, one of the main principles of accrual accounting requires that an asset's cost be proportionally ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Cyber Monday

    An expression used in online retailing to describe the Monday following U.S. Thanksgiving weekend. Cyber Monday is generally ...
  2. Bar Chart

    A style of chart used by some technical analysts, on which, as illustrated below, the top of the vertical line indicates ...
  3. Take A Bath

    A slang term referring to the situation of an investor who has experienced a large loss from an investment or speculative ...
  4. Black Friday

    1. A day of stock market catastrophe. Originally, September 24, 1869, was deemed Black Friday. The crash was sparked by gold ...
  5. Turkey

    Slang for an investment that yields disappointing results or turns out worse than expected. Failed business deals, securities ...
  6. Barefoot Pilgrim

    A slang term for an unsophisticated investor who loses all of his or her wealth by trading equities in the stock market. ...
Trading Center