What is a depreciation expense?
A depreciation expense refers to the process of spreading the cost of an item over the lifetime of the item. To account for depreciation, a company must create an asset on their books and then decrease the value of the asset over time.FunctionDepreciation expenses are used to space out the cost of equipment over the lifespan of the equipment.SignificanceCompanies prefer to space out the cost of equipment rather than account for it all at once because it makes their accounting more balanced. For example, if you bought a $20,000 van for your company, without depreciation you would have a $20,000 expense one year and no expenses any of the other years.Time FrameThe time frame for depreciation varies between purchases. For example, a van might be depreciated over 10 years while a computer might be depreciated over three or four years.ConsiderationsWhen calculating depreciation, you have to take into account the scrap value of the items. The scrap value is the amount, if any, that you recei
