Can you explain depreciation with examples?

Can you explain depreciation with examples?

Sure! Depreciation is the process of allocating the cost of a tangible asset over its useful life. For example, if you buy a car for $20,000 and expect it to last 5 years, you might depreciate it by $4,000 each year.

What are the different methods of calculating depreciation?

There are several methods, including straight-line, declining balance, and units of production. The straight-line method is the simplest, where you divide the cost by the number of years.

Can you give me an example using the declining balance method?

Absolutely! If you have a machine worth $10,000 with a 20% depreciation rate, the first year’s depreciation would be $2,000, leaving a book value of $8,000 for the next year.

How does depreciation affect taxes?

Depreciation can reduce taxable income, as it is considered an expense. This means you pay less in taxes in the years you claim depreciation.