BNET Business Dictionary
Business Definition for: Depreciation
- an allocation of the cost of an asset over a period of time for accounting and tax purposes. Depreciation is charged against earnings, on the basis that the use of capital assets is a legitimate cost of doing business. Depreciation is also a non-cash expense that is added into net income to determine cash flow in a given accounting period.
Example: To qualify for depreciation, assets must be items used in the business that wear out, become obsolete, or lose value over time from natural causes or circumstances, and they must have a useful life beyond a single tax year. Examples include vehicles, machines, equipment, furnishings, and buildings, plus major additions or improvements to such assets. Some intangible assets also can be included under certain conditions. Land, personal assets, stock, leased or rented property, and a company's employees cannot be depreciated.
Straight-line depreciation is the most straightforward method. It assumes that the net cost of an asset should be written off in equal amounts over its life. The formula used is(Original cost รขโฌ" Scrap value) / Useful life (years)For example, if a vehicle cost $30,000 and can be expected to serve the business for seven years, its original cost would be divided by its useful life:(30,000 รขโฌ" 2,000) / 7 = 4,000 per yearThe $4,000 becomes a depreciation expense that is reported on the company's year-end income statement under "operation expenses."
In theory, an asset should be depreciated over the actual number of years that it will be used, according to its actual drop in value each year. At the end of each year, all the depreciation claimed to date is subtracted from its cost in order to arrive at its book value, which would equal its market value. At the end of its useful business life, any undepreciated portion would represent the salvage value for which it could be sold or scrapped.
For tax purposes, some accountants prefer to use accelerated depreciation to record larger amounts of depreciation in the asset's early years in order to reduce tax bills as soon as possible. In contrast to the straight-line method, the declining balance method assumes that the asset depreciates more in its earlier years of use. The table below compares the depreciation amounts that would be available, under these two methods, for a $1,000 asset that is expected to be used for five years and then sold for $100 as scrap.Straight-line MethodYearAnnual DepreciationYear-end Book Value1$900 รโ 20% = $180$1,000 รขโฌ" $180 = $8202$900 รโ 20% = $180$820 รขโฌ" $180 = $6403$900 รโ 20% = $180$640 รขโฌ" $180 = $4604$900 รโ 20% = $180$460 รขโฌ" $180 = $2805$900 รโ 20% = $180$280 รขโฌ" $180 = $100 Declining-balance MethodYearAnnual DepreciationYear-end Book Value1$1,000 รโ 40% = $400$1,000 รขโฌ" $400 = $6002$600 รโ 40% = $240$600 รขโฌ" $240 = $3603$360 รโ 40% = $144$360 รขโฌ" $144 = $2164$216 รโ 40% = $86.40$216 รขโฌ" $86.40 = $129.605$129.60 รโ 40% = $51.84$129.60 รขโฌ" $51.84 = $77.76 The depreciation method to be used for a particular asset is fixed at the time that the asset is first placed in service. Whatever rules or tables are in effect for that year must be followed as long as the asset is owned.
Depreciation laws and regulations change frequently over the years as a result of government policy changes, so a company owning property over a long period may have to use several different depreciation methods.
- a reduction of a currency's value in relation to the value of other currencies
Wiktionary Definition for: Depreciation
- #The act of lessening, or seeking to lessen, price, value, or reputation.
- #The falling of value; reduction of worth.
- #the state of being depreciated.
Additional Resources
- Benefit From Bonus Depreciation In 2008: Save Even More With Cost Segregation
- While many are concerned about the downfalls of the country's economic slowdown, there is a silver lining. Congress has approved, as part of its national stimulus package, 'Bonus depreciation' for 2008. The benefits include the ability to take additional depreciation on qualifying property in 2008. The caveat is the very...
- White papers 2008-02-01
- Car Depreciation Calculator
- You can use this car depreciation calculator to estimate the first year and total depreciation on a car you're thinking about buying or already own. The calculator uses an accelerated rate of depreciation for cars that are brand new and provides the user with a range of possible depreciation rates...
- Tools & templates 2008-01-01
- What's a tape worth? (videotape depreciation)
- Faster depreciation at Blockbuster Blockbuster Entertainment, the company other publicly held chains have used as a model for their cassette-depreciation schedules, has quietly changed the way it values its video inventory. Since being acquire Faster depreciation at Blockbuster ...
- Research articles 1996-02-09
- CCTA plans PacBell depreciation fight. (California Cable Television Association; Pacific Bell Telephone)
- CCTA Plans PacBell Depreciation Fight The California Cable Television Association is fighting an FCC filing by Pacific Bell Telephone to accelerate by $301 million a year depreciation of the telco's $16 billion network in California. PacBe...
- Research articles 1991-05-27
- Recapturing depreciation in installment sales.
- IRS clamps down on recapturing depreciation in installment sales. Gain on the sale of an asset attributable to straight-line depreciation is taxed at a maximum rate of 25%. Rest of the long-term gain is taxed at a 20% top rate (some at 10% for taxpa ...
- Research articles 1999-02-05
- Deloitte: Change Depreciation for Real Estate.(Deloitte & Touche)(Brief Article)
- Current property depreciation methodologies are outmoded and need to be revised, argues Deloitte & Touche. In a recent study, the Big Five firm argues that the 39-year nonresidential and 27.5-year residential property depreciation schedule in cur Current property depreciation methodologies are outmoded and need to...
- Research articles 2001-01-01
- Calculating depreciation on a like-kind exchange or an involuntary conversion: temporary regulations have modified the rules for computing depreciation on exchanged or converted property. This article focuses on the use of the optional tables for like-kin
- EXECUTIVE SUMMARY * For like-kind exchanges and involuntary conversions, annual depreciation on carryover basis is split between the portion allocable to the relinquished property and to the replacement property. * Temp. Regs. Sec. 1.168i-6Te provides a transaction coefficient and other rules...
- Research articles 2006-01-01
- Allocating partnership depreciation between trusts and beneficiaries: a trust owning depreciable property through a partnership may have a larger income tax burden than if it owned the assets directly. This article reviews how partnership depreciation is
- EXECUTIVE SUMMARY * A trust partner must separately account for its share of partnership depreciation deductions, when doing so would result in a different tax liability than if not separately accounted. * Sec. 167 provides that the depreciation deduction is to be...
- Research articles 2007-07-01
- Adjusting depreciation allowable - for depreciation allowed
- When adjustments must be made to reflect depreciation taken *Allowed for depreciation which will be allowable in the future, the method for making that calculation is logical, but not necessarily obvious.Let's assume the taxpayer bought the property in May 1985 for $750,000 and 18-year ACRS is applicable. The client claimed...
- Research articles 1997-10-01
- Depreciation
- The article talks about the basic accounting principle. Measuring the loss in value of an asset is known as depreciation. Depreciation is considered an expense and is listed in an income statement under expenses. Straight-line depreciation is considered to be the most common method of depreciating assets.
- White papers 2003-01-01
- Investment Stimulation by a Depreciation Mechanism
- The paper investigates the possibility of utilizing the depreciation mechanism to provide incentives for undertaking investment in the real sector of the Russian economy. The proposed model of investor's behavior under risk and uncertainty considers a wide range of tax instruments. The paper derives the optimal timing rule for investment...
- White papers 2003-02-28
- How Much Should Depreciation Cost Me?
- The annual depreciation expense is calculated by applying a depreciation rate (average, high or low) to the new vehicle. Total depreciation is calculated for the number of years you expect to own the vehicle.
- Tools & templates 2008-01-01
- Meetings begin on depreciation schedule of canopies. (Top of the News).(National Association of Convenience Stores meets with Internal Revenue Service to discuss depreciation schedule for gasoline canopies )
- On Aug. 21, the National Association of Convenience Stores met with specialists from all areas of the Internal Revenue Service to discuss a procedure to reexamine the IRS' position regarding a five- vs. 15-year depreciation schedule for gasoline cano On Aug. 21, the National Association of...
- Research articles 2002-10-01
- More time for depreciation: IRS guidance makes it easier to take advantage of certain depreciation breaks.
- Under the "Job Creation and Worker Assistance Act of 2002," an additional 30 percent first-year bonus depreciation became available for certain property acquired after September 10, 2001 and before September 11, 2004, that is placed in service befor Under the "Job Creation and Worker Assistance...
- Research articles 2003-09-01
- Cash payments complicate depreciation of assets in like-kind swaps.(DEPRECIATION, Internal Revenue Service )(Brief Article)
- Depreciating assets acquired in like-kind swaps is tricky. Generally, property that is received in a tax-deferred exchange has the same income tax basis for depreciation as the traded property. Depreciating assets acquired in like-kind swaps is tricky. Generally, property that is received in a...
- Research articles 2004-03-12
- role of depreciation and the investment tax credit in tax policy and their influence on financial reporting during the 20th century, The
- Abstract. Since the inception of the modern income tax, the investment tax credit and depreciation have been some of the most modified provisions. This paper traces the history of major changes in depreciation and the investment tax credit along with the tax policy justifications given at the time the changes...
- Research articles 2000-12-01
- End to cap sought on van depreciation. (TaxWatch TRENDS, RULINGS, ANALYSIS).
- * Christopher Bond of Missouri, the ranking Republican member of the Senate Small Business Committee, recently asked the Department of the Treasury to use its regulatory authority to exempt light trucks vans from the current limits on depreciation deductions. Section 280F...
- Research articles 2001-11-19
- Modernizing depreciation schedules.
- Byline:Todd L. Treadway The Treasury Department now agrees with critics in business who have complained for years that depreciation schedules are woefully out of date and should be modernized. It's an issue Congress is likely to take up in a year or so. ...
- Research articles 2000-08-18
- Assets acquired in like-kind swaps can get faster depreciation.
- Assets acquired in like-kind swaps can get faster depreciation. Generally, like-kind property that's received in a tax-deferred exchange has the same income tax basis for depreciation as the traded property. But there has been confusion over how to write off replacement assets. Acquired...
- Research articles 2000-01-21
- Defining depreciation limits on qualified non-personal-use trucks and vans.
- On June 24, 2004, Treasury issued TD 9133, final regulations liberalizing the depreciation rules affecting taxpayers who use vans and light trucks in their trade or business. With exception, vans and light trucks fall under the luxury car depreciation limits if their gross vehicle weight is...
- Research articles 2004-12-01
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