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Depreciation

Depreciation spreads the cost of a long-term asset over its useful life, matching the expense with the revenue it helps generate.

Why Depreciate?​

  • Matching principle: Match cost with benefits received over time
  • Accurate profit: Don't overstate profit in purchase year
  • Tax benefits: Deductible expense over asset life
  • Asset valuation: Show current book value

What Gets Depreciated?​

Yes:

  • Buildings
  • Equipment
  • Vehicles
  • Furniture
  • Computers
  • Machinery

No:

  • Land (doesn't wear out)
  • Inventory (expensed when sold)
  • Small tools (usually expensed immediately)

Depreciation Methods​

Straight-Line (Most Common)​

Same amount each year.

Formula: (Cost - Salvage Value) / Useful Life

Example: $10,000 equipment, $1,000 salvage, 5-year life Annual Depreciation = ($10,000 - $1,000) / 5 = $1,800/year

Declining Balance​

Larger depreciation in early years.

Units of Production​

Based on usage rather than time.

Recording Depreciation​

Monthly entry:

Debit: Depreciation Expense       $150
Credit: Accumulated Depreciation        $150

Impact on Balance Sheet:

  • Equipment (original cost): $10,000
  • Less: Accumulated Depreciation: ($1,800)
  • Net Book Value: $8,200

Next Steps​

Learn about closing entries to prepare for a new accounting period.