The Myth of Depreciation

by Malcolm Simister

Accounting can be a multiple mystery of myths and one myth is that depreciation is something to do with the loss in value of an asset. Like many myths, the truth is much simpler.

The truth is that depreciation is simply how we spread the cost of an asset over its life. E.g. an asset (say a machine) costs $100k and the business will use it for four years and then scrap it. Annual depreciation (on a straight line basis) is $100k/4 = $25k. Simple.

This is nothing to do with the asset’s value for after a year’s use the business may only be able to sell the machine for $50-60k when its depreciated cost is $100–25k = $75k. Confusingly, this is called its written down value! This is similar for cars, computers and almost any asset.

The truth is that once accounting is explained simply, it’s really not that difficult, which is what I do in my online courses.

By the way, amortisation is exactly the same as depreciation except we depreciate tangible assets (those you can touch) but amortise intangible assets (those you can’t touch, like software). Just confusing double-speak – two words one meaning.

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