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Depreciation Analysis

Accounting is a process companies use to record and report their financial transactions. It also allows companies to use specific principles for avoiding large, one-time expenses. Depreciation is a specific principle dealing with reducing the value of assets.

  1. Facts

    • Accounting principles allow businesses to record the acquisition of major facilities and equipment as assets in their accounting ledger. Over time, companies must expense these items as the company uses them in business operations. This process is known as depreciation.

    Types

    • Common types of depreciation include straight-line, declining balance and units of production. Each method takes the asset value less salvage value, which equals the total depreciable value. Accountants will divide this amount using the appropriate method to determine a monthly depreciation expense amount.

    Effects

    • Depreciation creates a smoother flow for a company's income statement. Business owners and managers can review historical statements to find trends relating to revenues and expenses. Not using depreciation will create large fluctuations in business expenses.

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