Why do companies depreciate assets?
If a company buys a $100,000 machine that lasts five years and expenses it all at once, year-one profit collapses while later years look inflated. Depreciation follows the matching principle, pairing the cost with the revenue the asset helps produce. Land isn't depreciated because it doesn't wear out.
How do the main methods compare?
| Method | Formula | Pattern |
|---|---|---|
| Straight-line | (Cost − salvage) ÷ useful life | Same amount each year |
| Declining balance | Book value × rate | Higher early, lower later |
| Units of production | Depreciable cost × units used ÷ total units | Tracks usage |
Example: a $10,000 machine with $1,000 salvage value and a 5-year life costs $1,800 a year under straight-line. Because depreciation is non-cash, analysts add it back in EBITDA. It also reduces taxable income—US businesses use MACRS and may take bonus depreciation. Stretching useful lives to boost profit can cross into accounting fraud.
FAQ
- What happens when an asset is fully depreciated?
- It stays on the books at salvage value and can keep being used.
- Does my car depreciate?
- In everyday speech yes—its market value falls—but accounting depreciation applies to business assets.
Sources reviewed: 2026-10-25
References
- Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2019). Intermediate accounting (17th ed.). Wiley.