One doesn’t discover new lands without consenting to lose sight of the shore for a very long time. – Andre Gide
Business Accounting Tip
As you build your business it's important to understand the accounting aspect of depreciation.
"Depreciation is an accounting and finance term for the method of attributing the cost of an asset across the useful life of the asset.
The use of depreciation affects a company's (or an individual's) financial statements, and, in some countries, their taxes. Depreciation is an average or expected view of the decline in value of an asset. For example, an entity may depreciate its equipment by 15% per year. This rate should be reasonable in aggregate (such as when a manufacturing company is looking at all of its machinery), but there is no expectation that each individual item declines in value by the same amount."
A company typically owns a variety of assets that have long lives, such as buildings, equipment, and motor vehicles.
The period of service is referred to as the useful of the asset. Because a building is expected to provide service for many years, it is recorded as an asset, rather than an expense, on the date it is acquired.
Companies records assets at cost, as required by the cost principle. To follow the expense recognition principle, companies allocate a portion of this cost as an expense during each period of the asset's useful life.
Depreciation is the process of allocating the cost of an asset to expense over its useful life.
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