Capital Depreciation Definition

Machinery is a capital asset.

Accounting rules require firms to depreciate capital assets at the end of each month or quarter to ensure accuracy in financial statements. These rules include generally accepted accounting principles and Securities and Exchange Commission guidelines.

Definition

Capital depreciation is a business accounting process that allows a company to allocate the cost of a capital asset over the asset's useful life. A capital asset, also known as a fixed or long-term asset, is a resource that a company will use for more than one year. Examples include equipment, machines and buildings.

Significance

Capital depreciation is important because it helps a firm report accurate financial data. The firm's senior management generally invests in capital assets to upgrade current fixed assets or to improve efficiency in manufacturing processes and operating activities.

Accounting and Financial Reporting

To report capital depreciation, an accountant credits the accumulated depreciation account and debits the depreciation expense accountant. The accountant also reports depreciation expense amounts and accumulated depreciation amounts in the company's statement of profit and loss (P&L) and balance sheet, respectively. A balance sheet is also known as a statement of financial condition.

References

• Investopedia: Depreciation: Straight-Line Vs. Double-Declining Methods
• Investopedia: Depreciation
• Internal Revenue Service: A Brief Overview of Depreciation
• Internal Revenue Service: Section 179 Deduction - Special Depreciation Allowance - MACRS - Listed Property