Depreciation
The gradual reduction in the value of an asset over time due to wear and tear.
Depreciation allocates the cost of a tangible asset over its useful life rather than recording the full purchase price as an expense in the year of purchase. Common methods include straight-line, declining balance, and units-of-production. It is a non-cash expense that lowers taxable income without money leaving the business.
Formula
Straight-Line Depreciation = (Cost − Salvage Value) ÷ Useful LifeExample
A delivery company buys a van for $40,000 with a 5-year useful life—using straight-line depreciation, $8,000 per year is recorded as expense, reducing the van's book value annually.
Why It Matters for Your Business
Depreciation affects both reported profitability and your tax bill, so understanding it helps you plan equipment purchases and take full advantage of deductions like Section 179.
Practical Tips
- •Consult IRS Publication 946 for the correct useful life classifications of business assets.
- •Consider accelerated depreciation methods for assets that lose value quickly.
- •Track depreciation schedules in your accounting software to automate journal entries.
Related Terms
More Accounting Terms
Accounts Payable
Money owed by a business to its suppliers or creditors for goods or services received but not yet paid for.
Accounts Receivable
Money owed to a business by its customers for goods or services delivered but not yet paid for.
Accrual Accounting
An accounting method that records revenues and expenses when they are incurred, regardless of when cash is exchanged.
Asset
Any resource owned by a business that has economic value and can provide future benefits.
Balance Sheet
A financial statement showing assets, liabilities, and equity at a specific point in time.
Related Financial Guides & Resources
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