What is depreciation?๐Ÿ”ฅ

Depreciation is the way we value the future value of long term tangible assets.๐Ÿšš๐Ÿš

Depreciation essentially allows businesses to divide the cost of an asset over its lifetime.

The value๐Ÿ“ˆ lost each year is charged against the companies profits and loss accounts until the asset is worthless.

The cons of depreciationโœ”

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.๐ŸŽข

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.๐Ÿ‘Ÿ

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.๐ŸŽฉ

Depreciation vs Amortization๐Ÿ’Ž

Amortization is used to describe the long term value of assets that aren't tangible.

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