Depreciation is one of the basic accounting terms that is applied to the degree of wear and tear that happens to a firm’s assets. With the help of depreciation accountants can calculate whether it is time to replace the assets or not. It also helps the firm to reduce taxes applied on the firm and also allow inflation to affect the business. However all these concepts described about the accountants are the layman concept of depreciation. From an accountants point of view we can define accounting as a tool that helps in understanding asset account in a better way. In order to understand depreciation we need to have a complete knowledge of assets and expenses of a business. As we know anything that we spend in our business is called debit and expenses and assets can be differentiate with this term also. Expenses affect income statement and reduce the profit of firm as produce tax. On the other hand assets are recorded into balance sheet and don’t have a direct affect on profits. All the assets are recorded in balance sheet but it does not provide their worth. The worth of these assets is calculated when accountant depreciate them.
An asset can be depreciated by transferring some of its cost from the balance sheet to the income statement. For example if we assume that a building will last for 50 year we will add 2 percent of its cost from balance sheet to income statement each year to depreciate it.
Sidra Farid