What depreciation means and why it exists
When a business buys a fixed asset, an item expected to be useful for more than one accounting period, expensing the entire cost in the month of purchase would distort that month's numbers and understate every month after it, even though the asset keeps producing value the whole time.
Depreciation fixes this by spreading the cost across the asset's estimated useful life, so each period's accounts carry a fair share of the cost of the equipment that helped generate that period's revenue.
It is purely an accounting allocation. Depreciation does not measure wear, breakdowns, or how much the asset would actually sell for — those are separate, operational questions that a maintenance and condition record answers, not a depreciation schedule.
Straight-line vs. reducing-balance depreciation
Straight-line depreciation deducts the same amount every year: (purchase cost − estimated salvage value) ÷ useful life in years. A $12,000 machine with a $2,000 salvage value and a 5-year useful life depreciates $2,000 per year.
Reducing-balance (declining-balance) methods apply a fixed percentage to the asset's remaining book value each year, so the deduction is largest in year one and shrinks over time. This better reflects assets that lose value fastest early on, like vehicles and computer equipment.
Which method applies, and over what useful life, is usually set by tax rules or accounting standards rather than chosen freely — this is a finance and tax question to confirm with an accountant, not a default to assume from a glossary page.
Book value vs. the operational asset record
Book value (original cost minus accumulated depreciation) is what the accounts say an asset is worth. It routinely diverges from reality in both directions: a well-maintained forklift can be fully depreciated to near-zero book value while still doing daily work, and a poorly maintained one can carry meaningful book value while barely functioning.
This is why depreciation and asset tracking are separate systems answering separate questions. Depreciation, run in the accounting ledger, answers "what is this worth on the books this year." An asset register, run against location, custody, and condition, answers "where is it, who has it, and is it actually still working" — and only the second question tells you whether it is time to replace the asset regardless of what the depreciation schedule says.
A useful asset register links to the depreciation schedule (same purchase date, same cost) without trying to replace it — feeding accurate acquisition data into finance, while tracking the operational facts finance was never meant to hold.
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