DEPRECIATIONS

Depreciation has been used to describe the phenomenon that the value of an asset decreases over time. In other words depreciation is the loss of value for a fixed assets. Example:

End of year Market value Loss of value
0 15000
1 10000 5000
2 8000 2000

Depreciation is viewed as a part of business expenses that reduce taxable income:

Gross income
- cost of goods sold
- depreciation
- operating expenses
= Taxable income
- taxes
= Net income

Economic depreciation
The gradual decrease in utility in an asset with use and time:
- physical
- functional

Accounting depreciation
The systematic allocation of an assetís value in portions over its depreciable life:
- book
- tax

Factors to consider in asset depreciation:
- depreciable life
- salvage value
- cost basis
- method of depreciation