what is depreciation in finacial accounting?

Question

what is depreciation in finacial accounting?

Answer 1

Depreciation in financial accounting relates to 'cost recovery' of fixed assets.

Generally accepted accounting principles (GAAP) require capitalization of an asset with a useful life of one year or more. There are several different cost recovery (aka depreciation) methods that are acceptable under GAAP including straight-line, sum of the digits and hours used. Regardless of what method is chosen, it needs to be reasonable and consistently applied so a read of the financial statements isn't misled.

It is a little bit off to say that depreciation is used because something you purchased is worth less in the future. While the potential resale value might go down for some objects, buildings typically go up in their fair market value over time. Depreciation recovers/expenses the original purchase price.

Also, it should be noted that depreciation for tax purposes is much more strict in defining methods and lives. Financial depreciation is a significant accounting policy decided by management. Financial depreciation lives and methods DO NOT have to follow MACRS (or tax depreciation rules). Depending on its use, a building could be depreciated (for financial statement purposes) for 27 years or 75 years. (While the tax life is fixed.)

Hopefully this helps with your question. Please let me know if you need further details.

Answer 2

Depreciation can be taken on vehicles, buildings, furniture, fixtures, equipment, etc. that businesses purchase.

An example would be if a business purchased a computer for $600. Instead of just expensing this on the income statement to get to net income, this will be put on the balance sheet as a fixed asset. Now, this computer is said to have a 'life' of 5 years. In the current year, we will take a portion of that $600 and expense it ($600/5 years = $120 expense). This expense is called depreciation expense. The offset is accumulated depreciation, which will offset the computer purchase amount on the balance sheet ($600 computer - $120 of accumulated depreciation = $480 book value (the value of the computer per the books of the company). In the 2nd year we will take another portion of it, and so on for 5 years.
Depreciation is a way to take assets (large purchases) and expense their amount over a period of time instead of expensing the cost right away.

I found some good reads that talk a lot about this:
http://www.1031.us/Docs/Articles/WhatisDepreciation.pdf
http://en.wikipedia.org/wiki/Depreciation

Answer 3

Depreciation is taking the accounting for the fact that things are worth less as they age. Land doesn't depreciate but building, equipment, vehicles and most other things do. Take a house the IRS lets you take depreciation over 27.5 year so they are saying a house is worth less when it is old than when brand new. Most houses after a hundred years are no longer standing and those that are tend to be in bad shape.
So if you are using the home as a rental property you get a deduction for the using up of assets.
If you were to use a car to deliver pizza it would be worth much less in 10 years than the day you bought it. So when you decided to take the work you had to account for the cost of gas and wear on the car but also depreciation.

Answer 4

Depreciation is a number that accountants use to get tax breaks. It means that every year something is worth less money that way you can take the amount that it depreciates and get it taken off of the profits so you pay less taxes. Depreciation is a long way of taking repair cost off of the gross income so that your net income will be lower and will allow you to pay less in corporate income taxes.