The concept of depreciation of fixed assets is a fairly simple one for suitably accountants, booker keepers, finance directors and accounting students but often remains a mystery for non finance people. Moreover, because more and more businesses rely on accounting software which automates many transactions, including depreciation, even some finance people may not be fully aware of the exact bookkeeping entries involved.
Most assets in a business depreciate or reduce in value over time, through consumption or simple market value. Accounting practice seeks to recognize this and to decrease their value on the balance sheet over an estimated period of time equivalent to the useful life of the asset and at the same recognize the consumption of that asset by creating an expense in the profit and loss account during each accounting period during the life of the asset as the contra entry. As the fixed asset value is decreased so also the expense account is increased.
Most assets in a business depreciate or reduce in value over time, through consumption or simple market value. Accounting practice seeks to recognize this and to decrease their value on the balance sheet over an estimated period of time equivalent to the useful life of the asset and at the same recognize the consumption of that asset by creating an expense in the profit and loss account during each accounting period during the life of the asset as the contra entry. As the fixed asset value is decreased so also the expense account is increased.