TABLE OF CONTENTS This chapter introduces the concept of depreciation as applied to business and financial applications. The different methods of depreciation are discussed and are illustrated with several examples.
A capital asset is a piece of equipment, a building, or a vehicle for use in our business. When we buy a capital asset, we expect to use it for several years. The cost of these capital assets should be written off over the same period of time we expect them to earn income for us. Therefore, we must spread the cost over several tax years and deduct part of it each year as a business expense. As these assets wear out, lose value, or become obsolete, we recover our cost as a business expense. This method of deducting the cost of business property is called depreciation.
The concept of depreciation is really pretty simple. For example, let's say we purchase a truck for our business. The truck loses value the minute we drive it out of the dealership. The truck is considered an operational asset in running our business. Each year that we own the truck, it loses some value, until the truck finally stops running and has no value to the business. Measuring the loss in value of an asset is known as depreciation.
Depreciation is considered an expense and is listed in an income statement under expenses. In addition to vehicles that may be used in our business, we can depreciate office furniture, office...
