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. Absolute Physical Life

    The length of time that it takes for an asset takes to become ...
Related Articles
  1. Can real estate be depreciated?
    Taxes

    Can real estate be depreciated?

  2. An Introduction To Depreciation
    Active Trading

    An Introduction To Depreciation

  3. A Clear Look At EBITDA
    Markets

    A Clear Look At EBITDA

  4. Breaking Down The Balance Sheet
    Personal Finance

    Breaking Down The Balance Sheet

Hot Definitions
  1. Halloween Strategy

    An investment technique in which an investor sells stocks before May 1 and refrains from reinvesting in the stock market ...
  2. Halloween Massacre

    Canada's decision to tax all income trusts domiciled in Canada. In October 2006, Canada's minister of finance, Jim Flaherty, ...
  3. Zombies

    Companies that continue to operate even though they are insolvent or near bankruptcy. Zombies often become casualties to ...
  4. Witching Hour

    The last hour of stock trading between 3pm (when the bond market closes) and 4pm EST. Witching hour is typically controlled ...
  5. October Effect

    The theory that stocks tend to decline during the month of October. The October effect is considered mainly to be a psychological ...
  6. Repurchase Agreement - Repo

    A form of short-term borrowing for dealers in government securities.
Trading Center