Depreciation is the systematic reduction of the recorded cost of a fixed asset.
Examples of fixed assets that can be depreciated are buildings, furniture, leasehold improvements, and office equipment. The only exception is land, which is not depreciated. The purpose of depreciation is to charge to expense a portion of an asset that relates to the revenue generated by that asset. This is called the matching principle, where revenues and expenses both appear in the income statement in the same reporting period, which gives the best view of how well a company has performed in a given accounting period.
There are three factors to consider when you calculate depreciation, which are:
Depreciation has nothing to do with the market value of a fixed asset, which may vary considerably from the net cost of the asset at any given time.
To Calculate Depreciation for an asset is:
1. Write down the asset’s purchase price.
2. Estimate the salvage value, or how much the asset will be worth when it's no longer useful.
3. Calculate Depreciable Cost: purchase price - salvage value.
4. Estimate the asset's lifespan, which is how long you think the asset will be useful for.
5. Find the amount of Depreciation per Year by calculating depreciable cost/asset's lifespan.
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