Depreciation is the way we value the future value of long term tangible assets.🚚🚝
Depreciation essentially allows businesses to divide the cost of an asset over its lifetime.
The value📈 lost each year is charged against the companies profits and loss accounts until the asset is worthless.
The cons of depreciation✔
The rate of depreciation is decided by the directors. This means they can agree on a rate that benefits them in regards to tax charges on net profit or by making their profits look much bigger than they are by underestimating the rate of depreciation.🎢
There is no real way of truly determining how long the asset will last and what its true value would be at the end of its life term.👟
Because the methods used to ascertain depreciation is based on guesstimates by directors, a better way to determine the true performance of a company is to look at its cash flow statement or EBIDTA.🎩
Depreciation vs Amortization💎
Amortization is used to describe the long term value of assets that aren't tangible.