Depreciation — Core Concepts
Seven topics covering all three methods, T-accounts, partial years, and asset disposal. Click any card to expand.
Depreciation is the systematic allocation of an asset's cost over its useful life. It applies the matching principle: the cost of a long-lived asset is spread across the periods it generates revenue, not expensed all at once at purchase.
Important Distinction
Depreciation is an accounting allocation, NOT a measure of physical deterioration or market value decline. An asset can be fully depreciated but still in perfect working condition.
Three key points:
- Only tangible assets with finite lives are depreciated. Land is NEVER depreciated — it has an indefinite useful life.
- The journal entry — Dr. Depreciation Expense / Cr. Accumulated Depreciation — reduces net income and reduces the net book value of the asset on the balance sheet.
- Depreciation is a non-cash expense: no money leaves the company when depreciation is recorded. This is why it is added back to net income on the cash flow statement.
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