This, in an overly simplistic definition, is the process that companies use to spread or allocate the cost of a physical asset over its useful life. There are multiple methods of depreciation and this will determine a lot about how the "books" look and how many years of depreciation are used.

What does this look like? Management will need to determine what method is appropriate, the useful life of the asset itself, and assign a scrap/salvage value. The common methods used for calculating depreciation are:

  • Straight-line: the expense amount is the same every year during the assets useful years.
  • Sum-of-the-years-digits: the amount of expense declines year by year.
  • Double-declining balance: this is essentially straight-Line multiplied by 2.
  • Units of production: the expense will change year to year based on the number of units produced or hours used.

What to remember: Every company will need to choose the way that best suits their needs and objectives. i.e do your research and talk to your CPA.