Money Infant

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Accounting Depreciation

For accounting purposes depreciation is a way of accounting for the declining value of tangible assets that the business purchases. The assets that are accounted for with depreciation are those that are not immediately consumed, but rather have an extended period of usefulness. Depreciation does not assign a valuation to the assets, but is rather a method of allocation.

For example, computers and servers, machinery or physical buildings are all assets which are consumed over a period of years. Because these assets have extended useful lives they are not treated as current expenses when purchased. Instead the business reports depreciation expense in its financial statements. Think of it as using up the cost of acquiring the assets over time as the asset also declines in its utility to the company.

Depreciation of an asset begins when the asset is placed in service and the calculation of depreciation relies on 4 criteria. Those criteria are the cost of the asset, the expect salvage value when the useful life of the asset is exhausted, the estimated useful life of the asset and a method to account for the cost over the given lifespan of the asset.

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