Depreciation and Amortisation | CA Foundation Accounts Chapter 5 | CA Foundation Jan/May/Sep 25

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Depreciation is an accounting method of allocating the cost of a tangible or physical asset over its useful life or life expectancy. Depreciation represents how much of an asset's value has been used up. Depreciating assets helps companies earn revenue from an asset while expensing a portion of its cost each year the asset is in use. If not taken into account, it can greatly affect profits. Businesses can depreciate long-term assets for both tax and accounting purposes. For example, companies can take a tax deduction for the cost of the asset, meaning it reduces taxable income. However, the Internal Revenue Service (IRS) states that when depreciating assets, companies must spread the cost out over time. The IRS also has rules for when companies can take a deduction. Per the matching principle of accounting, depreciation ties the cost of using a tangible asset with the benefit gained over its useful life. There are many types of depreciation, including straight-line and various forms of accelerated depreciation. Accumulated depreciation refers to the sum of all depreciation recorded on an asset to a specific date. The carrying value of an asset on the balance sheet is its historical cost minus all accumulated depreciation.