From the course: Finance and Accounting Tips

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What is depreciation?

What is depreciation?

From the course: Finance and Accounting Tips

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What is depreciation?

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- You've probably heard the term depreciation. In a business or accounting context it's often misused and misunderstood. Part of the misunderstanding comes from its' opposite, the term appreciate. When something increases in value we say that the item has appreciated. You buy a house and its' value increases over time, you'll hear it said that the item has appreciated in value. It's worth more. But in accounting and business, depreciation is not the opposite of appreciation. Depreciation is not getting at an items' decline in value. In accounting, depreciation is allocating the cost of an item, an asset, over the time period that is benefitted by the asset. For example, a company purchases a piece of machinery to produce products that can be sold and generate revenue. Part of the cost of the revenue being generated because of that machine is the cost of that machine. Somehow the cost of that machine must be systematically allocated and matched to the revenue that it's generating…

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