Depreciation Definition and Legal Meaning

On this page, you'll find the legal definition and meaning of Depreciation, written in plain English, along with examples of how it is used.

What is Depreciation?

n. The loss of value of an asset over time through deterioration despite the fact that the item may retain its value or even increase its value due to inflation. Depreciation can be used by businesses as an income tax reduction that is spread out over the life of the asset or an accelerated rate in the early years of use.

History and Meaning of Depreciation

Depreciation is the decline in the value of assets over time. This decline may result from deterioration, obsolescence, or just aging of the asset. The concept of depreciation is important in taxation and accounting as it affects the determination of profits or losses, and the amount of tax an individual or business should pay. The practice of depreciation began in the late 19th century with the rise of accounting and industrialization.

Examples of Depreciation

  1. A business purchases a vehicle for $75,000, which has a useful life of 5 years. Every year, the business deducts $15,000 from its taxable income as a depreciation expense.
  2. A company buys a piece of equipment for $100,000 that has a useful life of 10 years. Every year, the company claims a depreciation expense of $10,000 on the equipment.
  3. A homeowner purchases a home for $400,000 which has a 30 year useful life. The homeowner can claim a depreciation expense of $13,333 every year for tax purposes.

Legal Terms Similar to Depreciation

  1. Amortization: A process of spreading the cost of an intangible asset over its useful periods.
  2. Depletion: A process of deducting the value of natural resources like oil, gas, or minerals due to their extraction from the earth.
  3. Expensing: A process of recognizing the full cost of an asset in the period it is incurred.