What Is Depreciation And Why It Is Important To Understand

What is depreciation involves the decrease in the value of an asset, such as a computer, car or machine. New items cost much more than used ones. This is because technological advances make some models outdated, and they also wear out with use. As an item grows older, its assessment needs to be adjusted.

Many important items depreciate. One can purchase the most powerful computer available, and just a few years later find that is too slow for the newest software. This is because computer technology advances quickly. Computers are items that rapidly drop in price.

Although they tend to maintain their value a little longer, cars also depreciate. A car remains functional and serves it purpose for many years. However, its mechanisms eventually deteriorate, requiring replacements and major repairs. More maintenance issues are expected from used cars, so they can be purchased at cheaper prices.

Not all car models depreciate in the same manner. Electric hybrids, for example, have a high demand. The manufacturers cannot make the fast enough, so they often keep their value. Some restored antique cars tend to appreciate (rise in price) because they are high in demand among collectors.

For tax purposes, businesses need to record depreciation of assets. The decrease in value can be important tax credits. It is a good idea to keep a paper trail.

Because investors need to know how the companies they support are doing, the decreasing worth of assets is also included in annual reports. An elaborate computer system will not be worth the same amount paid for it a few years before. The depreciated value would be calculated into the total assets instead of the original cost.

Households also need to be aware of the depreciation of valuable items. Insurance companies pay out what the item would have been worth at the time it was damaged or stolen. Adjustors use their own calculations to determine the amount. A ten year old car demolished in an accident will only receive the price it could have been sold for. This would probably be a fraction of the amount needed to buy a new one.

Amortization is how the amount of depreciation is determined. The easiest way to figure this out is to subtract how much the scrap from the machine can be sold for when it can no longer be used. Then divide it by the years it can be used.

A factory may purchase a stamping machine for $30,000. Once it is useless, it can be sold for about $1000 for scrap metal. This would mean that the total depreciation would be $29,000. If it is expected to last about ten years, then divide $29,000 by 10. The loss in value that would be recorded and subtracted from the worth of the machine each year would be $2900.

Both businesses and individuals should understand what is depreciation. Important equipment decreases in worth over the years. New technologies render some items useless over time, and machines tend to run down after extended use. This should be recorded for tax and insurance purposes.