Instead of appearing as a sharp jump in the accounting books, this can be smoothed by expensing the asset over its useful life. When a company purchases an asset, such as a piece of equipment, such large purchases can skewer the income statement confusingly. For instance, a widget-making machine is said to "depreciate" when it produces fewer widgets one year compared to the year before it, or a car is said to "depreciate" in value after a fender bender or the discovery of a faulty transmission.įor accounting, in particular, depreciation concerns allocating the cost of an asset over a period of time, usually its useful life. Conceptually, depreciation is the reduction in the value of an asset over time due to elements such as wear and tear.
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