Depreciation is the accounting method for spreading the cost of a long-lived asset over its useful life. When you buy a $30,000 delivery vehicle, you do not record a $30,000 expense in the year of purchase—you record a portion of the cost each year for the vehicle's useful life. Understanding depreciation helps you make better financial decisions and optimize your tax position.
Why Depreciation Exists
The principle behind depreciation is matching: expenses should be recorded in the same period as the revenue they help generate. A delivery vehicle helps generate revenue for several years, so its cost should be spread across those years rather than charged entirely to the year of purchase.
Common Depreciation Methods
Straight-line depreciation spreads the cost evenly over the useful life—a $30,000 vehicle with a 5-year life generates $6,000 of depreciation per year. Accelerated methods like double declining balance front-load the depreciation, generating more expense in early years and less in later years. For tax purposes, Section 179 and bonus depreciation allow immediate expensing of qualifying assets.
Key Takeaways
- Depreciation matches the cost of a long-lived asset to the periods it helps generate revenue.
- Straight-line spreads cost evenly; accelerated methods front-load depreciation.
- Section 179 and bonus depreciation allow immediate expensing for tax purposes—a different treatment than book depreciation.
