Depreciation Flashcards
What is the definition of depreciation?
Depreciation is the systematic allocation of the historical cost of an asset, less its residual value, over its useful life.
Why is depreciation an expense?
There is a depletion in an asset as it has been used to create future economic benefit. There is a decrease in equity due to a decrease in profit in the business. This transaction has not caused equity to decrease due to drawings from the owner.
Why is Depreciation limitation of the Financial Statements?
Depreciation is only an estimate. It could be miscalculated because we can only estimate residual value (selling price) and/or its useful life (years). The only thing certain is its historical cost.
Does depreciation calculate the market value of an asset?
No. It is an estimation of how much an asset has been used up, or worn out over its useful life when producing income for the business.
