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September 27, 2006

What is the purpose of depreciation?

The purpose of depreciation is to match the cost of a productive asset (that has a useful life of more than a year) to the revenues earned from using the asset. Since it is hard to see a direct link to revenues, the asset’s cost is usually allocated to (assigned to, spread over) the years in which the asset is used. Depreciation systematically allocates or moves the asset’s cost from the balance sheet to expense on the income statement over the asset’s useful life. In other words, depreciation is an allocation process in order to achieve the matching principle; it is not a technique for determining the fair market value of the asset.

The accounting entry for depreciation is a debit to Depreciation Expense and a credit to Accumulated Depreciation (a contra-asset account that is reported in the same section of the balance sheet as the asset that is being depreciated).

Learn more about Depreciation.

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About the Author: Harold Averkamp (CPA) has worked as an accountant, consultant, and university accounting instructor for more than 25 years.

He is the author of the 2010 Master Accounting Download Package which has been praised for it's ability to simplify accounting in a way that anybody can understand.



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Comments

6 Responses to “What is the purpose of depreciation?”

  1. OKEIYI SANDRA on February 26th, 2007 9:06 am

    Is Depreciation a source of fund?

  2. jasni kantod on January 28th, 2008 4:51 am

    If for instance, a lorry is fully depreciated in 10 years time, what will happen to the book value of the lorry ?. How to treat it in asset account ( T a/c ) ?
    Thanks

  3. deepak on July 17th, 2008 2:47 am

    what is the purpose of cotrol account

  4. m.khan on August 22nd, 2008 12:59 pm

    What is the purpose of depreciation?
    The purpose of depreciation is to match the cost of a productive asset (that has a useful life of more than a year) to the revenues earned from using the asset. Since it is hard to see a direct link to revenues, the asset’s cost is usually allocated to (assigned to, spread over) the years in which the asset is used. Depreciation systematically allocates or moves the asset’s cost from the balance sheet to expense on the income statement over the asset’s useful life. In other words, depreciation is an allocation process in order to achieve the matching principle; it is not a technique for determining the fair market value of the asset.

    The accounting entry for depreciation is a debit to Depreciation Expense and a credit to Accumulated Depreciation (a contra-asset account that is reported in the same section of the balance sheet as the asset that is being depreciated).

    Learn more about Depreciation.

  5. Ravinder Girdhar on May 31st, 2009 8:08 am

    really it is a very helpful site for a lot of accounting information. I am an accounting teacher and tell my students to visit this site to have more useful information.

  6. Aziz on October 17th, 2009 5:41 am

    our company management has decided to stop some of assets to be without work for the next year , How can we treat the depreciation ? - the book value for some of them is more than the market value and for others is less

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