Depreciation and amortization

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Depreciation:

Depreciation is an accounting and finance term for the method of attributing the cost of an asset across the useful life of the asset. Depreciation is an example of applying the matching principle as per generally accepted accounting principles.

Depreciation is often mistakenly seen as being a basis for recognising,"wear and tear", obsolescence, or impairment on an asset but these issues where seen as significant enough to account for are handled through an asset revaluation reserve.

The use of depreciation affects a company's (or an individual's) financial statements, and, in some countries, their taxes.

A company needs to report depreciation accurately in its financial statements in order to achieve two main objectives. Firstly, to match its expenses with the income generated by means of those expenses. Secondly, to ensure that the asset values in the balance sheet are not overstated: an asset acquired in Year 1 is unlikely to be worth the same amount in Year 5.

Depreciation is an average or expected view of the decline in value of an asset. For example, an entity may depreciate its equipment by 15% per year. This rate should be reasonable in aggregate (such as when a manufacturing ...