Primary Purpose of Depreciation

With the passage of time, the value of some assets such as manufacturing plant machinery and equipment decreases. Companies all over the world provide for depreciation on the assets. Depreciation is the process of spreading the reduced value of the asset over its productive life.

Significance

The value of assets diminish due to constant usage, wear and tear, and the availability of newer and more advanced products in the market. By providing for depreciation, the company is well-prepared when the asset becomes obsolete and has to be discarded.

Features

The provision for depreciation is exempt from taxation. That is, a company is not required to pay tax on the depreciation expenses. The money that the company saves can either be distributed to shareholders as dividends or reinvested into the business for expansion purposes.

Time Frame

Companies usually account for depreciation once every year.

Types

There are several methods in which companies depreciate their assets. The method is chosen after careful evaluation of the nature of the asset, its productive lifespan and the usage levels of the asset. Commonly used types of depreciation include the straight-line method, the sum-of-years method, units-of-production method, and the declining and the double declining methods.

References

• AccountingCoach: Introduction to Depreciation
• Investopedia: Depreciation