Depreciation

Let's explore a key concept in accounting for non current assets. Depreciation, depreciation is the systematic allocation of the cost of a tangible non current asset, such as vehicles, equipment, or buildings over its useful economic life. This approach matches the assets cost to the revenue it helps generate, following the matching or accruals concept. Instead of expensing the full cost at purchase, depreciation spreads the expense across each period the asset is used, providing more accurate profit representation and reliable financial statements. Accounting for depreciation involves estimating the assets initial cost, its useful life, expected residual value, and choosing a method to allocate the expense. Common methods include the straight line and reducing balance methods. Straight line spreads the expense evenly each year, while reducing balance applies a fixed percentage to the carrying amount, resulting in higher depreciation early on. The chosen method reflects how the business consumes the assets economic benefits. Depreciation has a dual impact within the financial statements. The depreciation charge is recorded as an expense in the income statement, reducing reported profit. At the same time, accumulated depreciation is shown in the statement of financial position, reducing the carrying or net book value of the relevant non current asset. Importantly, land is not generally depreciated as it is considered to have an indefinite useful life.