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What is depreciation

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What is depreciation under the Depreciation Act?

The Depreciation Act sets out the rules around a company's ability to depreciate its operating assets.

Depreciation is a legal requirement. The Depreciation Act allows depreciation of operating assets immediately or over several years. In practice, depreciation means writing down the value of an asset so that the book value matches the real value.

When you write off an asset, you write down its value. Assets must be depreciated so that the book value matches the real value. In practice, this means that a depreciation is an accounting entry of an asset that depreciates over its useful life.

What types of assets can be depreciated?

As mentioned above, they are assets that can be depreciated so that the book value matches the real value of the asset. Assets are the assets held by the company. Assets can be divided into operating assets and current assets. While operating assets are assets that are used in the operation of the company and with it are the prerequisite for the company's earnings, current assets are those that are intended for further sale, for example, an inventory of goods. Operating assets in which the company has invested and which are necessary for the company's earnings will, over time, in part due to wear and tear and obsolescence, typically decrease in value over time.

The operating assets of a company can be many different things, buildings, cars, machinery, ships, etc. Get an overview of depreciation rates.

Depreciation under the Depreciation Act may provide a deduction from the tax

The ongoing loss of value of the assets, i.e. operating assets, is an actual expense for the company, which the company must pay from its profits. The expense can be deducted from the company's earnings when the tax is to be calculated, via the amortization of the loss. Thus, the depreciation of the asset provides a deduction from the tax.

The value of different operating assets does not deteriorate in the same way, and the Depreciation Act describes the rules for the tax depreciation in the different situations.

For example, the value of a car falls significantly faster than a building. There will also be operating assets that do not lose value over time, and here, of course, no depreciation can be made.

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