Depreciation

1. Financial reporting - accounting practices.

Accounting depreciation spreads the cost of a long-term tangible 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.

Accounting depreciation is applying the accruals accounting principle to spread the total cost of tangible long term assets over their expected useful life.

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

Units of production is another common method.

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.

Some accounting jurisdictions use the term amortisation both for this aspect of accounting both for tangible and intangible assets.

Under International Financial Reporting Standards (IFRS), the relevant standards are IAS 16 for tangible longer-term assets, and IAS 38 for intangible longer-term assets.

Tax rules generally differ from the accounting, with the tax rules being much more prescriptive.

2. Foreign exchange.

A decrease in the value of a currency.

3. Other contexts.

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

See also

• Accruals accounting
• Accumulated depreciation
• Amortisation
• Appreciation
• Assets
• Capital allowances
• Capitalisation
• Carry trade
• Cash flow
• CertICM
• Cost
• EBITDA
• Financial reporting
• IAS 16 (Tangible assets - Property, plant and equipment)
• IAS 38 (Intangible assets)
• Impairment
• Intangible assets
• International Financial Reporting Standards (IFRS)
• International Fisher Effect
• Net book value
• Property, plant and equipment (PPE)
• Provision
• Reducing balance
• Revaluation
• Straight line
• Sum of the digits
• Tangible asset
• Tax depreciation
• Writing down allowance