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Depreciation

3 min. read

Depreciation is a common financial term, but often misunderstood. For example, look at the difference between buying an asset (like an adjusting table) and buying supplies or paying an expense. The supplies are used up (“expensed”) within a short time after purchase. Expenses are also used up very quickly. These expenses can be deducted from sales to determine profit for tax purposes.

In contrast, the adjusting table is going to be used for several years. How do you determine the expense of using the table? You could take the whole expense in one year, but why not spread it out over the years you’ll be using it? This is depreciation—the expense of using an asset spread over its useful life.​

Depreciation has no relationship to deterioration. An asset may physically wear out over time; this is physical depreciation or deterioration. An asset may also become obsolete. Newer computers and adjusting tables come on the market and cause the old ones to become obsolete. This is also called functional depreciation.​

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