What is Depreciation?
Depreciation refers to the reduction in the cost of an asset, at which it is recorded. As depreciation is included in calculating the net income, it plays a major part in determining a company’s cash flow. It is essential to note that depreciation does not involve any cash flow.
Depreciating Assets
An asset which has a restricted effective life and whose value is expected to reduce reasonably over the time it has been used, is called a Depreciating Asset. The time taken by an asset to depreciate is known as the ‘effective life’ of that asset.
The value of an asset is seen as a business expense throughout the life of that asset. The assets that can be depreciated generally include tangible assets and equipment. Assets such as furniture, computers, machinery, automobiles are some of the examples of assets that depreciate.
Supplies are not considered as Depreciating Assets as they are usually supposed to be consumed or sold out within a year. Items of trading stock and land are excluded from this category. Fixtures on and improvements to land such as installing windmills or fencing the land, may be included in the same and be treated separately from land.
