Depreciate

Definition

Accounting:

In accounting, to “depreciate” means to systematically write off the recorded cost of a tangible fixed asset over a set period of time. This process is known as “depreciation” and is a method used to allocate the cost of an asset over its useful life.

Economics:

In economic terms, “depreciate” refers to a decline in the market value of an asset over time. This decrease can be due to factors such as wear and tear, obsolescence, or market conditions.

Examples

1. Accounting Depreciation:

   • A company purchases a delivery truck for $100,000. If the truck has a useful life of 10 years, the company may use a straight-line depreciation method to write off $10,000 each year as an expense on its income statement.

2. Economic Depreciation:

   • A piece of machinery initially valued at $50,000 might be worth only $30,000 after five years due to wear and tear and advancements in technology that make it less valuable in the market.

Frequently Asked Questions (FAQs)

Q1: What are the common methods of depreciation in accounting?

A: The most common methods of depreciation are Straight-Line, Declining Balance, Units of Production, and Sum-of-the-Years-Digits. Each method has different calculations to determine the depreciation expense for each period.

Q2: Can land be depreciated?

A: No, land cannot be depreciated because it typically does not have a finite useful life and does not wear out or become obsolete over time.

Q3: What is accelerated depreciation?

A: Accelerated depreciation is a method that depreciates an asset faster in the earlier years of its useful life, resulting in higher depreciation expenses initially and lower expenses in later years.

Q4: How does depreciation affect financial statements?

A: Depreciation reduces the book value of assets on the balance sheet and is recorded as an expense on the income statement, thereby reducing net income.

Q5: What is residual value in depreciation?

A: Residual value, or salvage value, is the expected value of an asset at the end of its useful life. It is subtracted from the asset’s purchase cost to determine the total amount to be depreciated.

Related Terms with Definitions

• Amortization: The process of gradually writing off the cost of an intangible asset over its useful life.
• Asset: A resource owned by an individual or entity that has economic value.
• Straight-Line Depreciation: A method where an equal amount of depreciation expense is allocated each year over the useful life of the asset.
• Declining Balance Method: A method that applies a constant depreciation rate to the declining book value of the asset each year.
• Sum-of-the-Years-Digits (SYD): A depreciation method that results in more depreciation expense in the earlier years of an asset’s life and less in the later years.

Online References

1. Investopedia - Depreciation Definition
2. Wikipedia - Depreciation
3. Accounting Coach - Depreciation Overview

Suggested Books for Further Studies

1. “Financial Accounting For Dummies” by Maire Loughran
2. “Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield
3. “Financial & Managerial Accounting” by Carl S. Warren, James M. Reeve, and Jonathan Duchac

Fundamentals of Depreciation: Accounting Basics Quiz

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