Depreciation
Depreciation is a caption we hear about typically, but don’t really learn. It is an vital component of accounting however. Depreciation is an expense that’s documented at the same time and in the same generation as other accounts. Long-term running assets that aren’t held for sale in the course of business are called fixed assets. Fixed assets include buildings, machinery, office equipment, vehicles, computers and some other apparatus. It should also involve items such as shelves and cabinets. Depreciation refers to spreading out the cost of a fixed asset over the years of its beneficial life to a business, instead of charging the complete cost to expense in the year the asset was bought. That way, every year that the tools or asset is used bears a share of the total worth. As an example, cars and trucks are generally depreciated over five years. The concept is to demand a fraction of the total cost to depreciation expense over each of the five years, rather than just the first year.
Depreciation applies only to fixed assets that you in fact purchase, not those you rent or lease. Depreciation is a real expense, but not exactly a cash outlay expense in the year it’s recorded. The cash outlay does in fact occur when the fixed asset is acquired, but is noted over a period of time.
Depreciation is different from other costs. It is deducted from sales revenue to determine revenue, but the depreciation expense noted in a reporting period doesn’t need any true cash outlay during that period. Depreciation expense is that part of the complete cost of a business’s fixed assets that is allocated to the period to record the cost of using the assets during period. The higher the complete cost of a business’s fixed assets, then the higher its depreciation expense.
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