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Depreciation

Depreciation is the annual reducing value of a fixed asset over time.

It is normally calculated either on a straight line basis e.g. the value of the asset is reduced by a fixed amount over a fixed number of years, or as a reducing amount based upon a percentage reduction each year.  Both methods are correct.

The idea of calculating depreciation is to spread the cost of ownership of an asset over it's useful economic life of the assets.  Depreciation is declared in the financial accounts of the business and thus reduces it's profits.

Assets can depreciate either from wear and tear or becoming obsolete e.g. new models are released.

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