Financial modelling terms explained

# Depreciation Expense

When a company buys an asset it is recorded in the balance sheet as an asset, and the value of the asset is reduced by a certain percentage each year, called the depreciation expense.

## Who Are the Users of Depreciation Expense?

The depreciation expense is a financial report that records the decrease in the value of an asset over time. The depreciation expense is used to calculate the taxable income of a company. The depreciation expense is used to calculate the net income of a company. The depreciation expense is used to calculate the cash flow of a company. The depreciation expense is used to calculate the balance sheet of a company. The depreciation expense is used to calculate the income statement of a company.

## How Do You Calculate Depreciation Expense?

The depreciation expense calculation begins with the determination of the asset's depreciation base. The depreciation base is the cost of the asset less the asset's estimated salvage value. The depreciation expense for a particular period is then calculated by multiplying the depreciation base by the percentage of the year that has passed since the asset was put into service. This percentage is referred to as the depreciation rate.

## What Are the Different Methods of Depreciation?

There are three main methods of depreciation: straight line, sum of the years digits, and units of production.

Straight line depreciation is the most common method. It assigns the same value to each year of the asset's life. Sum of the years digits depreciation assigns more value to the earlier years of the asset's life, and less value to the later years. Units of production depreciation assigns more value to the years in which the asset is used more, and less value to the years in which the asset is used less.

## What Is the Difference Between a Deferred Charge and an Accumulated Depreciation?

The main difference between a deferred charge and an accumulated depreciation is that a deferred charge is a one-time event, while accumulated depreciation is an ongoing process. Deferred charges are created when a company books an expense before it actually pays for the good or service. This can happen, for example, when a company pays for a good or service in advance. The company will then record a deferred charge on its balance sheet, which is a liability that represents the amount it owes for the good or service. Accumulated depreciation, on the other hand, is the depreciation that a company has recorded over time for assets that it has already purchased. This depreciation is recorded as an expense in the company's income statement.

## What Is the Difference Between Straight-Line Depreciation and the Sum-of-the-Years'-Digits Depreciation Method?

Straight-line depreciation is a method of depreciation in which an asset's depreciation expense is equal for each year of its useful life. The sum-of-the-years'-digits depreciation method is a method of depreciation in which an asset's depreciation expense is greater in the early years of its useful life and lesser in the later years.

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