Depreciation

The gradual transfer of the initial cost of a fixed asset, from Capital Expenditure, such as an item of machinery, e.g. a ride-on mower, from the Balance Sheet to the Profit and Loss Account. The amount of depreciation shows how much an asset has lost of its value. For example, if an item of machinery was purchased for £25,000 and was valued as having a life span (or economic life) of 5 years, this would mean it would depreciate in value over 5 years, but the actual amount of depreciation would depend on the method used: typically either Straight Line Depreciation or Reducing Balance Depreciation.

The Financial Reporting Standard FRS 15 Tangible Fixed Assets, paragraph 78 states that “The fundamental objective of depreciation is to reflect in operating profit the cost of use of the tangible fixed assets (ie amount of economic benefits consumed) in the period.”