What Is Depreciation Basis?

Depreciation is an accounting concept businesses use to expense assets over a specific period of time. An asset's depreciation basis is the starting point for determining its monthly or quarterly depreciation expense.

Facts

Depreciation basis depends on how a company acquired an asset. Traditionally, an asset's value was the historical cost a company paid for the asset. Companies may now use the asset's fair market value in certain situations.

Acquisition Method

Companies can purchase assets, receive them as gifts, inherit items from another company or exchange older assets for newer ones. Other acquisitions may be possible depending on the company's business operations.

Features

Fair market value as a depreciation basis represents what the company would pay for an asset in an arms-length transaction. Acquisition costs--such as freight or installation--can increase the depreciation basis of the asset.

Function

To depreciate assets, companies determine the amount of use each asset has in a monthly time period. The depreciation basis is divided by the usage amount and expensed each month on the company's income statement.

Benefits

Depreciation allows companies to avoid expensing large, one-time purchases in a single accounting period. Businesses create a more-accurate picture of their company's net income by depreciating assets over several months or years.

References

• American Institute of Certified Public Accountats: What Is an Asset's Depreciable Basis?