What is Depreciation - Leigh Barker Tangible Assets

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What is Depreciation

• Leigh Barker

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Depreciation is an accounting expense as opposed
to a real expense.

• Depreciation is the amount allocated during an
  accounting period to amortise or reduce the cost
  of a long term asset over its useful life.
  Depreciation does not represent real cash flow.
• Depreciation is an accounting method that allows
  for the reduction of the value of n asset over
  time and is identified as a non-cash transaction.
• Depreciation indicates how much of an assets
  value has been used up over a period of time as
  all assets are expected to be less efficient as
  time passes thus the cost of the asset is
  generally spread over several years.

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Assets depreciate from general wear and tear of
obsolescence

• Wear and tear is the damage or deterioration
  inevitably occurs from the ordinary use of an
  asset whereas obsolescence is where a long term
  asset becomes old and outdated.
• While the depreciation expense is reported in the
  profit and loss statement there is also a
  separate account in the balance sheet known as
  accumulated depreciation which discloses the
  decline in value of an asset over the life of the
  asset.

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The two most common methods of depreciation are

1. The prime cost method which assumes that the
   value of the depreciating asset decreases
   uniformly over its effective life.
2. The diminishing value method which assumes that
   the value of the depreciating asset decreases
   more in the early years of its effective life.

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Please note

• Prepared by Leigh Barker Accountant at MWC Group,
  Portfolio Finance, Gordon and West Pennant Hills.
  Note that all content of this blog is general in
  nature and anyone intending to apply the
  information to practical circumstances should
  seek professional advice to independently verify
  their interpretation and the informations
  applicability to their particular circumstance.