Depreciation is an accounting term which puts a value on normal wear and tear of tangible assets. For example, an engineering company will have machinery which will have a specific purchase cost. The machinery may function for many years before needing replacement, but the company will eventually have to replace it at sometime in the future. This is is reflected in the accounts.

Rather than do this as one lump sum in a single accounting year, a proportion of the original cost of the machinery is written down over a number of years, until it's accounting value is no more than scrap value. So depreciation is effectively devaluing an asset due to wear and tear.

Note that even when the company finally writes off the remaining value of the machinery it doesn't mean that the machinery may not still have some functional value, but from an accounting point of view it will be deemed worthless.

What to do if you need more help

If you need more help with your specific commercial loan, mortgage or insurance requirement please speak to a professional financial adviser.

We hope you found this information useful.

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