When it comes to business, the concept of depreciation can be a tricky one to understand. In accounting and finance, depreciation is the decrease in the value of an asset over time, whether due to wear-and-tear, obsolescence, or other factors. In the business world, depreciation is seen as an expense, and as such, it is subtracted from the revenue of any given period and recorded as an accounting adjustment.
Depreciation affects a wide range of assets, from outdated tech equipment to real estate investments. Let’s take a look at how depreciation works with each type of asset.
Tech Equipment
The rate of depreciation depends on the type of asset and its expected lifespan. With tech equipment, which often becomes outdated quickly, depreciation is generally applied on a yearly basis. For example, computers may be depreciated over a 5-year period, as advances in technology render them obsolete.
Real Estate
Most real estate investments tend to depreciate over time, due to the wear-and-tear of everyday use. The Internal Revenue Service (IRS) provides guidelines on how to calculate the depreciation of a real estate asset. They allow an investor to depreciate a structure over a 27.5 year time frame, or according to the expected useful life of the property.
It’s important for business owners to understand depreciation, as it affects their bottom-line. By calculating it regularly, they can gain a clear understanding of their assets’ value over time and make informed business decisions.