Depreciation

Depreciation is the reduction in the value of an asset from wear-and-tear or obsolescence. Depreciation allowance encourages companies to invest in new equipment. For accountants, it gives a proper match of the cost of using the asset to the current revenues by periodic allocation of the original cost to expenses over the life of the asset. Historic cost depreciation is based on the original cost. Replacement cost depreciation is the actual cost to currently replace the asset. Depreciable cost is the difference between the original cost and salvage value of the asset. Straight-line depreciation divides depreciable cost equally over the asset's useful life. Units-of-production depreciation matches cost to output using the cost per unit of production. Accelerated depreciation produces larger reductions for depreciation in the early years of life and includes: (1) Sum-of-years digits method where depreciable cost is multiplied by the number of years remaining and divided by the sum of all the digits in the number of years in the asset’s life, and (2) Double declining method where the depreciation rate is double that of straight-line depreciation.