What is Depreciation - Leigh Barker Tangible Assets

1. Leigh Barker What is Depreciation

2. 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.

3. 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inevitably occurs from the ordinary use of an asset whereas obsolescence is where a long term asset becomes old and outdated.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.

4. The two most common methods of depreciation are • The prime cost method which assumes that the value of the depreciating asset decreases uniformly over its effective life. • The diminishing value method which assumes that the value of the depreciating asset decreases more in the early years of its effective life.

5. 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 information’s applicability to their particular circumstance.