Depreciation
Depreciation is a financial concept that refers to the reduction in the value of a capital asset over its useful life. It is usually applied to assets such as machinery, vehicles, buildings and computers. Depreciation is used to spread the cost of using these assets over their useful lives. This takes into account wear and tear and obsolescence. Depreciation is primarily used in accounting. This is to give an accurate picture of the current value of assets.
Building residual value and reserves
Depreciation also helps determine the residual value of assets at the end of their useful life. For example, consider an expensive machine, which is sold after 3 years; the residual value is then the purchase price minus depreciation costs (often a fixed percentage per year). In doing so, it also helps companies build up reserves for future replacements.
