Depreciation

AAA

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.

INVESTOPEDIA EXPLAINS '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.

VIDEO

RELATED TERMS
  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. Accelerated Depreciation

    Any method of depreciation used for accounting or income tax ...
Related Articles
  1. Fundamental Analysis

    Why are capital expenses (CAPEX) treated differently than current expenses?

    Learn the difference between capital expenditures, or CAPEX, and current expenses, and determine why they are treated differently on income taxes.
  2. Fundamental Analysis

    Does a capital expenditure (CAPEX) immediately affect income statements?

    Learn the direct and indirect effects a capital expenditure, or CAPEX, may immediately have on a business' income statements and its profit.
  3. Taxes

    Can real estate be depreciated?

    Decrease the amount of taxable income on your income-producing real estate by depreciating the asset on your federal income taxes.
  4. 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.
  5. Markets

    A Clear Look At EBITDA

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

    Breaking Down The Balance Sheet

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

    Depreciation: Straight-Line Vs. Double-Declining Methods

    Appreciate the different methods used to describe how book value is "used up".
  8. 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 ...
  9. 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.
  10. Investing Basics

    How To Evaluate A Company's Balance Sheet

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

You May Also Like

Hot Definitions
  1. Treasury Bond - T-Bond

    A marketable, fixed-interest U.S. government debt security with a maturity of more than 10 years. Treasury bonds make interest ...
  2. Weight Of Ice, Snow Or Sleet Insurance

    Financial protection against damage caused to property by winter weather specifically, damage caused if a roof caves in because ...
  3. Weather Insurance

    A type of protection against a financial loss that may be incurred because of rain, snow, storms, wind, fog, undesirable ...
  4. Portfolio Turnover

    A measure of how frequently assets within a fund are bought and sold by the managers. Portfolio turnover is calculated by ...
  5. Commercial Paper

    An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories ...
  6. Federal Funds Rate

    The interest rate at which a depository institution lends funds maintained at the Federal Reserve to another depository institution ...
Trading Center