The gradual diminution, loss or decrease in the utility value of an asset as resulting from wear and tear. Depreciation may take place due to use, passage of time, or market changes/ technological obsolescence. Depreciation reflects the permanent and continuous deterioration in the quality, quantity or value of an asset over the passage of time (over the period of its use).
Though depreciation does not directly involve any cash flows, its has an indirect impact as depreciation expense can decrease the amount of payable taxes a the end of the period.
There are multiple methods for depreciation including: straight line method (SLM), declining balance depreciation (double-declining balance depreciation, variable declining balance depreciation), sum-of-the-years’-digits method, etc. Selection of the appropriate depreciation method depends on a firm’s aggressiveness in depreciating its assets over the period of use for tax purposes.
Comments