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Simple English definitions for legal terms
depreciate
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A quick definition of depreciate:
Depreciate: When something gets older or used up, it becomes less valuable. This is called depreciation. For example, a car that is brand new is worth more than a car that is 10 years old because it has been used and has wear and tear. In accounting, we use depreciation to show how much an asset has lost value over time.
A more thorough explanation:
Depreciate
In accounting, to depreciate means to decrease the value of an asset over time due to factors such as age, wear and tear, or technological advancements. This reduction in value is recorded on a company's financial statements as an expense.
- A company purchases a delivery truck for $50,000. Over the next five years, the truck is expected to lose value due to wear and tear, so the company depreciates the truck by $10,000 per year.
- A business buys a piece of machinery for $100,000. However, after a few years, newer and more efficient machinery becomes available, causing the value of the original machinery to decrease. The business depreciates the machinery accordingly.
These examples illustrate how companies use depreciation to accurately reflect the decreasing value of their assets over time. By recording depreciation as an expense, companies can better understand their true financial position and make informed decisions about future investments.