Depreciation

1. Financial reporting

Accounting depreciation spreads the cost of a long-term asset over its total life.

The depreciation accounting charge reflects:

• the estimated periodic cost to a business
• of a physical capital asset
• spread over its estimated useful economic life.

Accounting depreciation seeks to ensure that the total accounting cost of a capitalised asset is appropriately spread and matched to the economic benefits of using the asset.

Methods of spreading the total accounting cost include Straight line, Reducing balance and Sum of the digits.

Financial reporting standards generally permit the use of any systematic basis of allocating the total cost over the useful life of the asset.

It's important to be clear about the distinction between the:

• Depreciation charge for the period, reflected in the income statement; and
• Cumulative depreciation provision at the end of the period, reflected in the balance sheet.

The depreciation charge is an in-period accounting expense, charged against profits for the period.

The cumulative provision for depreciation is a liability in the balance sheet. It's offset against the cost of the assets, to calculate their accounting net book value.

2.

More generally, any decrease in the value of an asset resulting from the passing of time.

3. Foreign exchange

A decrease in the value of a currency.

See also

• Accumulated depreciation
• Amortisation
• Appreciation
• Assets
• Capital allowances
• CertICM
• Cost
• EBITDA
• International Fisher Effect
• Net book value
• PPE
• Provision
• Reducing balance
• Straight line
• Sum of the digits
• Tax depreciation
• Writing down allowance