Depreciation

Depreciation. If you buy a car or a van for your business, it will get old and over time lose its value. In other words, the asset is falling or depreciating in value over time. This depreciation needs to be reflected in a company's accounts to allow for the loss value of any assets during the accounting period. In other words, profits are reduced a bit and so are the value of the assets in the balance sheet.

There are several ways of depreciating the value of an asset - for example, straight line allows for a fixed amount to be written off each year, declining balance means a set percentage of the remaining cost is written off each year.Occasionally a company will get a pleasant surprise, selling an asset for more than its written down value (or book value).

But there are also unpleasant surprises which hit the share price when a company discovers that its assets are not worth as much as it thought they were.

Accountants can play tricks with depreciation but the taxman keeps its eyes open for abuse!

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Last Updated: June 2007 © Moneyextra.com

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