Depreciation can be defined as a reduction in the recorded cost of a fixed asset. There are a number of fixed assets that are routinely depreciated every year such as buildings, furniture, office equipments and other physical things. The land is the only fixed asset that is not depreciated over time as it is not depleted over time. The aim of depreciation is to match the portion of the cost of the fixed asset with the revenue that is generated by that fixed asset. The effect of the depreciation on the balance sheet is that is shows a gradual decline in the cost of all the fixed assets recorded in a balance sheet.
While accounting for the depreciation we need a number of information that can be mentioned as follows. The first very important information that is required to calculate depreciation is useful life of the asset that is the time period over which a company thinks its asset will remain productive. After the completion of the useful life the asset no more remain productive. Depreciation is only calculated over the useful life period of an asset.
Salvage value is another important factor that is required to calculate depreciation. This means if a company is going to dispose off an unproductive asset is it going to sell it at a reduced price. The reduced price at which the asset is sold is called the salvage value of the asset. Deprecation is calculated by subtracting salvage value from the recorded cost of the asset.
There are a number of different methods to calculate depreciation such as accelerated depreciation method, declining balance method and sum of the digit years method of calculating depreciation.