Meaning of Depreciation


Depreciation is made on the company’s fixed assets, which lose value over time through natural wear and tear and through their use. Aging, wear and tear, but also external influences, accidental damage and falling prices are the causes of impairment. These reductions in value are recorded in the accounts and referred to as depreciation. A general distinction is made between scheduled depreciation and unscheduled depreciation .

How do you determine the amount of depreciation?

Depreciation is a deductible loss of value and is considered a business expense. In this way, these losses in value determined by accounting reduce the company’s profit and thus the tax burden. The tax law designation is deduction for wear and tear (AfA) . Depreciation is taken into account as an expense in the determination of profit ; Companies that have accumulated excessive depreciation within one year can compensate for this in the following year.

Start of depreciation

According to wholevehicles, the depreciation begins with the operational readiness of an operational acquisition. This is not the time when actual use begins, but the day of purchase or delivery. The depreciation is calculated precisely to the month. For example, if a machine was delivered on August 15th, the entire August is written off. If the financial year corresponds to the calendar year, five months are written off in this case. The actual annual depreciation amount is determined by dividing the annual depreciation amount by 12. This amount is multiplied by the number of months to be written off.

End of depreciation

The depreciation is carried out until the asset is segregated or no book valuehas more. This is the case in the event of scrapping, sale or loss. In the case of scheduled depreciation of the asset, its book value in the last year of use is 0. If the book value of an asset is already 0 and full depreciation has been carried out, some of this asset can still be used if the condition allows it. In this case, the asset is carried on with a low memory value, for which a monetary unit is applied. If an asset is to be sold, the proceeds from the sale must be determined. The proceeds from the sale can reduce the imputed loss in value and the associated depreciation volume. A presumed realization proceeds may not be recognized under commercial law.

Different methods of depreciation

The depreciation methods differentiate between direct and indirect depreciation. With direct depreciation, the expense is deducted directly from the value of the asset, which is then shown in the balance sheet. The current depreciation is subtracted directly from the historical acquisition costs . In the case of indirect depreciation, an item for value adjustment must be created. All future depreciation is accumulated on this value. All depreciation must be collected in indirect depreciation and recognized as an adjustment item. They appear with a negative sign on the assets side of the balance sheet or are recorded as a value adjustment with a positive sign on the liabilities side of the balance sheet.

It can be depreciated using either the straight-line method or the declining balance method. With straight-line depreciation, the respective depreciation amount is distributed linearly over the years of use. If you write declining balance, you use higher depreciation amounts in the first years of use, which decrease over time. This approach corresponds to the actual depreciation of investments much better. It is common knowledge that cars or IT equipment lose more of their value in the first few months after purchase than in the further course of time.

Treatment of depreciation on fixed assets

For items that are used economically over a longer period of time in the company and are acquired as fixed assets, the recording of manufacturing or acquisition costs in the year of manufacture or acquisition does not take place as a complete expense. The manufacturing or acquisition costs are spread over the years of use of this item. This is how the annual depreciation can be shown.

How depreciation occurs

Depreciation can have the following causes:

  • usage-related wear and tear
  • temporal wear
  • Weather conditions
  • Accidents
  • Depreciation due to technical progress
  • Expiry of property and usage rights.

Why depreciation is formed

With depreciation, the current value of the business assets and the depreciation are shown as costs. In cost accounting, the depreciation must be included in the price calculation . They represent a business expense and reduce the taxable profit. A depreciation affects the valuation of an asset in the commercial balance sheet. With the “deductions for wear and tear” the maximum limits must always be taken into account.

The amount of a depreciation may not exceed the acquisition or production costs minus the loss in value within a valuation period. On the assets side of the balance sheet, depreciation represents an impairment. A distinction is often made between imputed depreciation and depreciation under commercial law. Imputed depreciation, which does not appear in the bookkeeping, is carried out for in-house calculations. They only reflect the reality and actual value of an asset. The commercial depreciation, on the other hand, appears in the bookkeeping and is prescribed by law in terms of form and amount.