Depreciation

Depreciation is an accounting strategy for distributing the cost of a tangible or physical item over its useful life. This strategy assists organizations in determining how much of an asset’s value has been utilized. It also assists in realizing the revenue generated by the asset while documenting a portion of the asset’s costs each year.

This portion of the cost is known as depreciation expenditure. There are several ways to calculate depreciation charges. The straight-line approach, the declining balance method, the double declining balance method, the sum-of-the-year’s-digits method, and the units of production method are among them.

Depreciation expenditure is computed based on the asset’s nature. Some assets decline steadily, so the depreciation expenditure is constant throughout the asset’s life. Others lose the majority of their value in the first few years, leading the depreciation expenditure to decrease with time.

The Formula: