Skip to main content

What is depreciation?

Depreciation, in accountancy, term used to denote: (1) the loss in value of an asset due to use, obsolescence, or effluxion of time; and (2) the provision for such loss as a charge against profits earned.

There are several methods of providing for depreciation in accounts, such as the straight-line method and the reducing balance method. Under the first of these methods a fixed percentage of the original cost is written off each year; for example, at 10 per cent per annum, the entire cost would be written off in 10 years. Under the reducing balance method the percentage is applied to the balance brought forward each year so that with an asset costing $100 using a 10 per cent rate, $10 is written off the first year, $9 the second year, and so on.

Other methods take into account the desirability of providing for the replacement cost rather than the original cost of an asset, or the setting up of funds invested outside the business for interest.

Scroll to Continue

Related Articles