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 – 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 – 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 × 20% = $180$1,000 – $180 = $8202$900 × 20% = $180$820 – $180 = $6403$900 × 20% = $180$640 – $180 = $4604$900 × 20% = $180$460 – $180 = $2805$900 × 20% = $180$280 – $180 = $100 Declining-balance MethodYearAnnual DepreciationYear-end Book Value1$1,000 × 40% = $400$1,000 – $400 = $6002$600 × 40% = $240$600 – $240 = $3603$360 × 40% = $144$360 – $144 = $2164$216 × 40% = $86.40$216 – $86.40 = $129.605$129.60 × 40% = $51.84$129.60 – $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
- 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
- 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
- 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
- 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
- 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
- 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
- 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
- New Respect for Depreciation Accrual
- Depreciation gets little respect nowadays. We all know how much investors have come to dread accounting accruals, so nowadays, many who want to examine capital charges lean toward the real thing; the actual capital expenditure number which is deemed to be superior to the so-called fictional depreciation figure. This is...
- External links 2008-12-16
- Straight-Line Depreciation
- This tool tells you the straight-line depreciation of an asset or, the amount of depreciation for each period.
- Tools & templates 2008-01-01
- Names hang on to value; MALCOLM TUMBRIDGE helps turn the tables on depreciation
- DEPRECIATION is one of the few things that can still make grown men cry. If you have a weakness for nice cars and think your penchant will cost you dear, then think again. Depreciation is a two-sided coin. Turn the weakness into strength by choosing when to buy...
- Research articles 2008-05-21
- 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
- Measuring Capital
- The paper calculates Canadian reproducible capital services aggregates under alternative assumptions about the form of depreciation, the opportunity cost of capital and the treatment of capital gains. Five different models of depreciation are considered: one hoss shay; straight line depreciation; declining balance or geometric depreciation; linearly declining efficiency profiles and...
- White papers 2003-02-01
- 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
- Depreciation
- Depreciation, which is the allocation of the expense that reflects the "using up" of capital assets employed by the entity, is subject to a number of different calculation approaches. Conceptually, this allocation is done over the useful life of the asset in a "systematic and rational" manner. Any difference between...
- White papers 2003-01-01
- Depreciation method changes.
- The IRS recently released final, temporary and proposed regulations specifying when changes in depreciation and amortization will be considered accounting-method changes under Sec. 446 (TD 9307, 12/22/06). The rules also reflect the Service's attempt to provide more consistent treatment and increased certainty for taxpayers on ...
- Research articles 2007-05-01
- 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
- 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
- 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
- Depreciation changes put car makers in a spin.
- ABIX via COMTEX) -- The Australian Taxation Office has announced that it will change tax rules on automobiles purchased after 1 July 2002. The depreciation on new vehicles purchased in Australia will be spread over eight years, which could add an additional one per cent to ...
- Research articles 2002-06-25
- Spending surge.(Bottom Line)(Brief Article)
- Depreciation may be under-appreciated--except by CFOs and some number-savvy CEOs, But if the economic analysts at New York-based Merrill Lynch & Co, are correct, a temporary 50% accelerated depreciation allowance now in the U.S. tax code could produce a surge in capital expenditures later this...
- Research articles 2004-03-01
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