What Is Asset Depreciation?
An asset is a tangible item which has a monetary value, such as a building, car, computer or bookcase. Most assets wear out and decrease in value, or depreciate, over time. If a business purchases an asset which has a life expectancy of more than one year, it cannot write off the full cost as an expense the year it is purchased. Instead, the cost is prorated over the expected life of an item, and that prorated amount is deducted as asset depreciation.
An asset is a tangible item which has a monetary value, such as a building, car, computer or bookcase. Most assets wear out and decrease in value, or depreciate, over time. If a business purchases an asset which has a life expectancy of more than one year, it cannot write off the full cost as an expense the year it is purchased. Instead, the cost is prorated over the expected life of an item, and that prorated amount is deducted as asset depreciation. In accounting, an asset is depreciated differently for the profit and loss schedule than it is for income tax purposes. Asset depreciation for business purposes is based upon the actual time the company expects to use the item, while depreciation for tax purposes uses a set life expectancy based upon the class of property and determined by the governmental taxing authority. For example, a business may purchase a car it intends to only use for three years, so the asset depreciation will be spread over three years for the profit statements.
Depreciation is the loss in value from wear and tear of an asset of your business. That loss in value can be claimed as an expense and has implications for your tax reporting. A car, for example, is a depreciable asset and the deduction you can make (or its loss in value) gets apportioned over a number of years.
