Explanation

Depreciation is the loss in the value of a fixed asset over time. This loss occurs due to wear and tear from use, passage of time, obsolescence, or other factors that reduce an asset’s usefulness and value.

When a business buys equipment, vehicles, or buildings, these assets gradually lose value. Depreciation spreads the cost of the asset over its useful life, matching the expense to the periods that benefit from using the asset.

Depreciation is not an appropriation of profit – appropriations are deliberate allocations of profit like dividends or reserves. It is not the estimated life of an asset, though useful life is used to calculate depreciation. It is certainly not an increase in value – that would be appreciation, the opposite of depreciation.

Common methods of calculating depreciation include straight-line (equal amounts each year) and reducing balance (higher amounts in early years, decreasing over time).