What Is An Asset Depreciation
Assets need to have a value, and with many larger purchases such as plant machinery or large computer systems they have an initial value when purchased, this will decline in value over time. Instead of these large purchases being put into one specific month in your P&L, they are 'written down' over their useful life.
For example if a company purchased a new tractor for A�150k, and its useful life was 10 years, they would have it as an asset on their balance sheet (i.e. a positive to the business) and depreciate it by A�15k every year until the end of its 10 year useful life, rather than have to take a large charge in the year they purchased it.
This is widely used, and many businesses will have a policy that items over a certain value are written off of over a specific period depending on the item and its application, this is usually shown in the company accounts. You should depreciate the asset over its useful lifetime, there is not much point depreciating a car over 75 years, as its unlikely it would be useful to the business for more than 5/6 years before it was uneconomical to run and repair.
The same can be said for computer equipment, which generally only has a useful lifespan of between 3 or 4 years depending on its application. If an item lasts for more than your projected 'useful lifetime' you can still use the item in your business, it just means it is fully 'paid up' and no further 'value' or 'cost' lies in it for your company.
If you sell an item before the end of its useful life you must also account for this, when things become more complicated it can be useful to employ the services of an accountant who can help you accurately track each asset and therefore ensure you depreciate it over the correct term and are able to find where it is being used in your company in case it is ever sold, broken or comes to the end of its useful life.
There are also many software packages out there to help track assets, and many accounting packages have built in features to do this.
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