What Is Meant By Depreciation?

Depreciation is defined as a measure of wearing out, consumption or other loss of value of a fixed asset whether arising from use, passage of time or obsolesence through technology or market changes.

Long-lived assets are often called fixed assets. Except for land, which you usually use indefinitely, long-lived assets have a limited useful life. The number of accounting periods over which an asset is expected to be useful is called its service life.In accounting, you debit a portion of the cost of a long-lived asset as an expense in each period of its service life. This portion is called the depreciation expense for the period. The principle is exactly that for prepaid expenses, such as the insurance policy described earlier. A one-year insurance policy provides protection for each of the next 12 months, and 1/12 of the prepaid amount becomes an expense in each of those months.

If a long-lived asset has a service life of 120 months, that is, 10 years, a portion of its cost becomes an expense in each of those months. You may want to calculate depreciation expense on the straight-line basis, which is the method used in most entities. In this method, an equal fraction of the asset's cost is debited to Depreciation Expense in each month of the asset's service life. The service life of the asset is usually less than its physical life. If an asset cost $12,000 and is expected to have a service life of 120 months, 1/120 of the $12,000, or $100, is debited as depreciation expense in each of the 120 months.

Depreciation is a term in accountancy used to refer to the decrease in the value of a property due to wear and tear caused to it with age. It also means a reduction in the purchasing value of a currency. For example ' a depreciation of the dollar against the Rupee'.