Depreciation

Definition: The decrease in value of a fixed asset over time, usually due to wear and tear. Note that there is true value depreciation (reduction of the sales value of an asset) and there is accounting depreciation.

Example: You buy a piece of equipment for $100,000 that should last 5 years. That $100,000 is expensed $20,000 per year for five years for your accounting expenses. This matched the use of the equipment with the revenue it generates.

Why It’s Important: The cost may be depreciated in different amounts over different time periods for your accounting records and tax reporting. Picking depreciation methods with higher depreciation in the early years often saves taxes.