Depreciation

This is a non-cash expense which spreads the cost of an asset over its useful life.

Typically assets (for example vehicles, IT equipment, fixtures and fittings) decrease in value over time; depreciation reflects this by reducing the asset’s value on the balance sheet in accordance with the business’s depreciation policy. The depreciation policy will reflect the business’s particular needs and can differ over time; typically land assets are not depreciated, although buildings and plant on them may be. The non-cash expense is then charged to the current year’s profit and loss. In this way the business shows a more accurate reflection of the cost of its operations (otherwise it could show large losses in the year of purchase and large profits in the years the asset was used).

Depreciation is a term normally found in financial management, accounting and reporting;

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