Depreciation vs. Expense

Expenditures are depreciated when their occurrence helps produce revenues in multiple periods.

Depreciation is the allocation of the decrease in an asset's value across the multiple accounting time periods of its usefulness. Such a procedure is done whenever the asset is useful in producing revenue across multiple time periods and is done through allocating a portion of the decrease in value as an expense in each period. In comparison, expenses recorded and accounted for in one single period were useful only for producing revenues in that period.

Accrual Basis Accounting

Most accounting is done on an accrual basis, meaning that costs and revenues are recognized on the accounts at time of their occurrence. In contrast to cash basis accounting, accrual basis accounting must admit a certain degree of estimation into its figures due to the inherent uncertainty in collecting owed sums. Rules and regulations exist in accounting to tamper down any resultant distortions in the data.

Matching Principle

One such rule is the matching principle. It is one of the most fundamental principles behind accrual basis accounting and states that costs should be matched to the same time period as the revenues that their occurrence helped produce. Doing otherwise can result in large distortions for income/loss figures whenever large decreases in value that should have been spread out over time come due in one single period.

Expense

Expenses are expenditures that are only useful in producing revenues for the single time period in which they were incurred. For example, the repair cost for an asset that restored it to functionality would be counted as an expense, while renovation costs that improved that same asset's usefulness and longevity would have to be depreciated.

Depreciation

Depreciation is done whenever an asset is used to produce revenues across multiple time periods. Even when costs are useful in producing revenues across multiple time periods, they are recorded as assets in order to be depreciated. For example, if costs were incurred in producing a patent that would produce revenues for the business for years to come, those costs would be recorded as an asset under the name of patent. Depreciation spreads the expense of the decrease in an asset's value over time, being both a more faithful depiction of what is happening in truth and avoiding distortions in time periods when useless assets are disposed of.

References

• IAS Plus: IAS 16, Property, Plant, and Equipment
• IAS Plus: IAS 38, Intangible Assets