What is Depreciation?

Some of the finest things in life – fine wines, gourmet cheeses, antiques, and true love all come to mind – only get better with age. Barring such exceptions to the rule, however, we generally tend to view the passage of time as a negative influence on value. The concept is not a difficult one to grasp – cost (and perhaps nostalgic appeal) aside, would you prefer the sleek new yacht or the leaky, barnacle-encrusted steam liner of old?

Just as we could describe our “appreciation” of a vintage merlot, depreciation is the term used in realm of finances, accounting, and economics to describe the natural reduction in an asset’s market worth due to usage, natural processes of wear and tear, rot and rust, technological obsolescence, or any other factors that make it less describable.

While such a definition is certainly functional, depreciation in the business world is a bit more complex than this explanation would imply. For example, technical usage in accounting statements involves a company accurately reporting the relationship between their expenses and any revenue generated by those expenses.

Measuring Depreciation

There are several ways in which depreciation can be calculated, most of which are based on the passage of time or the use of the asset in practical settings. Some of the more common of these techniques are:

• Straight-line depreciation
• Declining balance method
• Activity-based assessment
• Sum-of-years depreciation (in other words, that most based on chronology)
• Units of production method

Each of these approaches involves its own series of formulas through which a conclusion about an asset’s change in worth is eventually deduced.

Contact Us

For more information on how asset depreciation can affect the solvency of your business, and to learn if bankruptcy might be an effective option, Contact the experienced team of Boca Raton bankruptcy lawyers at the offices of Eric N. Klein & Associates, P.A., today by calling 561-353-2800.