Depreciation is the process of distributing an expense periodically and recording it in our accounting.

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Depreciation is also the loss of value over time of an asset throughout its physical or economic life. Thus we allocate a percentage of its value as an expense for the fiscal year.

When an asset is purchased, it is quantified and depreciated over the years of useful life it has.

With depreciation, the cost of an investment is divided among all the years of use, for example, we buy a car, and we depreciate it year by year.

What to consider when depreciating an asset

When depreciating an asset you must consider several aspects:

• Asset acquisition price: This is the price at which we buy (without taxes).
• Useful life: Time that we will use that asset.
• Accounting depreciation: (Acquisition price / Useful life).
• Accumulated depreciation: This is the amount we have already depreciated up to this moment.
• Book value: This is the value that asset has at a given moment (Acquisition price - Accumulated depreciation = Book value).

How to depreciate an asset

Different asset depreciation methods can be used, these are the best known:

• Straight-line method: which consists of calculating depreciation in fixed and constant installments. If for example, we buy an asset for €600 for which we calculate that the residual value it will have after 5 years will be €200, we will have to depreciate €80 each year, that asset will therefore have a depreciation of €80/annually.

• Fixed rate method on a decreasing depreciable base: which consists of calculating depreciation by calculating a percentage that we will apply to the pending depreciation value at the beginning of each fiscal year.

• Sum-of-the-years-digits method: which consists of calculating depreciation with both increasing and decreasing installments and the annual provision decreases each year.

We hope this information is very useful to you :)