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What is depreciation in regards to accounting?

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Quick Answer

In accounting, "depreciation" refers to the decrease in value of an asset over time. Income statements reflect this decrease in value during an accounting period as a depreciation expense.

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Full Answer

The most common way of measuring depreciation is straight-line depreciation. The formula for straight-line depreciation is the purchase price of the asset minus the salvage value, divided by the total life of the asset. The salvage value is the estimated amount of money for which the company could sell the asset once the asset is no longer being used. Land does not depreciate because accounting principles assume that land lasts indefinitely. Assets that depreciate include machinery, fixtures, cars and buildings.

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