Depreciation Flashcards
What is the definition of Depreciation
Depreciation is the systematic allocation of the historical cost of an asset, less its residual value, over its useful life
Why is Depreciation an expense
There is a depletion of an asset as it has been used to create future economic benefit. There is a decrease in equity due to decrease in profit of the business. This transaction has not caused equity to decrease due to drawings of the owner
Why is depreciation a limitation of the financial statments
Depreciation is only an estimate. It could be miscalculated because we can only estimate its residual value (selling price) and/or its useful life (year).
The only thing certain is its historical cost.
Does depreciation calculate the market value of an asset
No!
It is an estimation of how much the asset has been used up or worn out, over its useful life when producing Income for the business
