depreciation

The charge in a company's accounts which reflects the reduction in value of an asset over time as its useable life is exhausted.

Depreciation is charged before calculation of profit, on the grounds that the use of capital assets is one of the costs of being in business and one of the contributors to profit.

There are two main methods of depreciation:

1. Straight line: the residual (scrap) value of the asset is deducted from its original cost, and the resultant figure is divided by the estimated life of the asset. The result of that is deducted annually over the life of the asset. So an asset that costs £10,000 and that has a residual value of £200 with a useable life of 4 years is depreciated by £2450 per year.
2. Reducing balance: the amount of annual depreciation is a constant proportion of the cost of the asset.

Depreciation has no effect on cash flow. It is just an accounting procedure.