What is depreciation?

depreciation expenseDepreciation is an accounting technique used to spread the cost of an asset purchase (e.g., equipment) over the useful life of the asset.

The idea is that if you make a large capital purchase, such as a building or equipment, the equipment or building isn’t “used up” in one year. You will use the asset to produce income for several or many years to come.

Depreciation matches up the future income produced by having the equipment with the cost of the current purchase. It also acknowledges that equipment wears out over time.

For example, if you buy a piece of manufacturing equipment for $50,000 you’ll presumably use that equipment for a number of years. So instead of taking the full $50,000 cost as an expense this year, you’ll spread it over several years.

Different types of assets have generally agreed upon “useful lives” and these schedules are used to calculate depreciation.

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