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Depreciation
Manage episode 332209030 series 3342280
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Assets such as machinery and equipment are expensive. Instead of realizing the entire cost of an asset in year one, companies can use depreciation to spread out the cost and match depreciation expenses to related revenues in the same reporting period. This allows a company to write off an asset's value over a period of time, notably its useful life. Depreciation is an accounting method that companies use to apportion the cost of capital investments with long lives, such as real estate and machinery. Depreciation reduces the value of these assets on a company’s balance sheet
One of the consequences of generally accepted accounting principles is that, while cash is used to pay for a long-lived asset, the expenditure is not listed as an expense against revenue at the time. Instead, the cost is placed as an asset onto the balance sheet and that value is steadily reduced over the useful life of the asset This reduction is an expense called depreciation.
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