Learning about Depreciation in Accounting Perspective

It is said that all things depreciate over time. And in business, the only things that do not go into depreciation are land or perhaps, art pieces such as paintings. In accounting language, depreciation is defined as the amount of expense that is charged against the business’s earnings to write off the cost of an item over its useful live. Depreciation is an essential element in accounting and an important consideration in a business. Several factors determine a product’s depreciation such as obsolescence, wear and tear and salvage.

 There are two methods used in computing for depreciation. These are the Straight Line and Accelerated Depreciation method. In a Straight Line method, the expense is incurred in equal amounts over the life of the asset for each business period, assumingly. The Acceleration Depreciation method is used if the expense is assumingly incurred in decreasing amounts over the asset’s useful life for every business period. The accelerated method also uses two commonly used variations such as the sum-of-years digits (SYD) and the double-declining balance (DDB) methods. The Accelerated Method is commonly used in treating tax expenses while the Straight Line method is used for financial reporting.

Depreciation is treated as an expense that should be recorded at the same time and period as with other accounts. Long-term operating assets of a business that are not for sale in are known as fixed assets. These include buildings, plant and machinery, computers, furniture and fixtures, office equipment, vehicles and others. In depreciation, the cost of a fixed asset is spread out over the years of its useful life, instead of treating the entire cost as an expense in the year that it was acquired. This is done so that the equipment bears a share of the total cost for each year that it is used. For instance, vehicles are usually depreciated over five years. In getting its depreciable value, a fraction of the total cost is treated as part of depreciation expense for the whole five years, rather than just for the first year only.

Depreciation only applies to fixed assets that are purchased, not those that are rented or leased. Depreciation is a real expense but is not necessarily a cash outlay expense in the year that it was recorded. A cash outlay only happens when the fixed asset is acquired, which is recorded over a time period.

Depreciation differs from other expenses. It is deducted from sales revenue in order to determine profit during a particular period, but a true cash outlay is not really required when the depreciation expense is recorded. Depreciation expense comprises a chunk of the total cost of a business's fixed assets, which is allocated to record the cost of using the assets during a particular period. The higher the total cost of fixed assets, then the higher is its depreciation expense.