Depreciation is referred to as a recording of reduction in value of business assets in use over several years.
Each fixed asset, which a company buys, loses, of course with time its value. For the reduction in value is for example the wear and tear responsible. However, also the progress of technical advancement is responsible for the reduction in value of an older product.
These reductions in value must be recorded in accounting otherwise 20 years old machines would stand in a company under fixed assets with their original price.
Economic goods of the fixed assets are written off in a way that the expenditure on acquisition, production or replacement, is distributed evenly over the expected operating life.
For the recording of reductions in value, there are various depreciation methods or types of depreciation: the loss of value of an asset (E.g. a piece of land) is recorded annually through depreciation and accounted for as an expense. A regular amortization (abbreviation: AFA) is applied only to depreciable assets
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