Depreciation is a term that indicates the monetary expression of wear of fixed assets during given period. It is gradual reduction in the value of assets. Depreciation respects the physical wear and gradual deterioration (obsolescence) of property. As it is part of the costs, it therefore reduces profit without having costs actually incurred.
Depreciation is distinguished into:
- Accounting - an enterprise sets it itself, depending on the assets depreciation affected by the expected rate of use. Accounting depreciation is not tax deductible.
- Tax - the amount is determined in the law on income tax. For simplicity, the same calculation can be used for accounting depreciation.
Use of the term depreciation in practice: Depreciation is a cost that is not an expense. The manager can affect the amount of cash flow by chosen way of depreciation.
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