Why we charge depreciation on fixed assets?
Part of the concept is to spread the investment for a piece of equipment (or other fixed asset) over the life of the asset. For instance, if you spend $5000 on some equipment and expect it to last 5 years, that’s pretty much an investment of $1000/year. The IRS has specific rules, so I’m just paraphrasing, but the idea is that you should recover the worth of the asset (or at least account for it) in each year that you use it and it has value. They don’t want to do it all at once, because you could depreciate all your income in one year. Nor do you want to spread it out over 50 years, because the return to you is minimal at best. So it’s usually given a time period to depreciate. After that, you’ve deducted your investment, and you can throw it in the trash or continue to use it. As for “why”, usually expenditures required to generate income are deductable. If you made $1000 but you had to spend $700 to do it, you really only made $300. So deductions are how we account for this sort of
