Long-lived assets

Depreciation

Spreading an asset's cost over the years in which the business uses it.

01

Technical definition

Systematic allocation of a tangible asset's depreciable amount over its useful life.

02

How it works

Depreciation matches the asset's cost with periods receiving benefit. Straight-line depreciation divides cost less residual value by useful life. The entry debits depreciation expense and credits accumulated depreciation.

03

Everyday example

Cost 26,000, residual value 2,000 and six-year life produce annual straight-line depreciation of $4,000.

04

Common pitfall

Depreciation is cost allocation, not a direct estimate of market-value decline and not a cash payment.