What is Depreciation?
Depreciation is a decline in value experienced by many assets over time. For example, cars tend to depreciate over the course of several years of ownership. Factors like wear and tear, the conditions of the market, and age can all have an impact on this decline. Some assets grow more valuable or appreciate over time, such as real estate.
In some cases, depreciation can be quite staggering. New cars, for instance, are infamous for depreciating almost as soon as they leave the lot, which can be frustrating to car owners if they try to sell their cars later. Computer equipment also depreciates quickly, thanks to the fact that it becomes technically obsolete very rapidly, as do things like appliances.
This decline in value is certainly something that people should consider when purchasing a new asset, especially for people who think that they might need to sell such assets off at a later date. Researching the rate of loss for various brands, makes, and models of new purchases can sometimes be quite revealing, and may generate information that could influence an eventual purchase. It is also important to think about changes in the market that might have an impact on the the gain or loss of value. For example, a home in the suburbs could depreciate in a depressed economy, while a fuel-efficient car might appreciate.
Many systems of taxation have a specific set of rules regarding depreciation, recognizing that it is a cost of doing business. In these cases, the word is used as an accounting term, and it has a slightly different meaning than the conventional meaning. If, for example, a company buys a computer system, it is allowed to write the cost of the computer system off all at once, or to write it off in chunks over the years as the value depreciates while the product is still generating revenue. In accumulated depreciation, an accountant divides the cost of the item by the number of years of expected life to write off an even chunk of money each year. In accelerated depreciation, the write-off amount is higher in the early years, and lower in the later years.
There are some significant advantages to using depreciation when writing off assets. For example, the cost of a large purchase can be amortized over several years of taxes, providing a tax benefit over the course of several years, rather than all at once. Tax accountants typically advise their clients on the most advantageous course of action to take when filing taxes.
@anamur: No, the cost (what you paid) for an item will not change because of depreciation. Depreciation records what an item is worth in subsequent periods.
So, if you purchase an item for $10,000 and decide it has a useful life of 10 years and will therefore depreciate $1,000 per year, then at the end of the 10 years, the remaining value of the item is $0. After year five, it would be halfway depreciated and would be worth half the original cost, or $5,000. Hope this helps!
I understand that we calculate accumulated depreciation to keep track of how much something cost initially and to see what the cost of depreciation is. But how do we figure out how much something, let's say, a piece of equipment depreciates each year?
If a piece of equipment costs $10,000 and depreciates at a rate of $1,000 a year, then, at the end of the tenth year, is the total cost of the equipment $20,000? Has the item cost twice as much as it's original price because it has depreciated so much?
I think everything which can be bought and sold inevitable depreciates with time and use. It doesn't have to be things like houses or cars.
Many people like to make some extra income by selling their used items like electronics, makeup, films, books and even shoes on online auctions and sales. I've sold some jewelry myself this way. What I've noticed is that unused or new items depreciate very little. Especially items with well-known brands are sold easily and one can generally sell it for the same price that they paid for it in the first place.
Used items though depreciate quickly. I think there can be some exceptions, like collectibles and popular items which are sold out otherwise, may not depreciate much. But usually, you are lucky to get half the original value of an item if it has been used.
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