What is depreciation and how does it work?

What is depreciation and how does it work?

Depreciation is the reduction in value of an asset over time, often due to wear and tear. It helps businesses account for the loss of value.

Why is depreciation important for businesses?

Depreciation is important because it affects financial statements, tax liabilities, and helps businesses plan for asset replacement.

Can you explain the different methods of calculating depreciation?

Sure! The most common methods are straight-line, declining balance, and units of production. Each has its own way of allocating the asset's cost over time.

How does depreciation impact taxes?

Depreciation can reduce taxable income, as businesses can deduct depreciation expenses from their revenue, lowering their tax burden.

What assets typically depreciate?

Assets like vehicles, machinery, buildings, and equipment typically depreciate over time due to usage and obsolescence.