What are depreciations and how much can one depreciate?

What are depreciations - this question arises for many young entrepreneurs. The following blog post provides information on why depreciations are made and how much they can be.

What are depreciations?

Depreciations account for systematic or unsystematic devaluations of assets. Depreciation is done because the current value of the business's assets must always be evident in accounting. Therefore, the loss of value that occurs due to aging or wear must be reflected in the accounts. A depreciation is made. Depreciations also prepare for the moment when a machine needs to be replaced. Because depreciations were made beforehand, this machine can then be purchased.

A distinction is made between declining balance depreciation and straight-line depreciation. With straight-line depreciation, a fixed amount is written off each year. With declining balance depreciation, on the other hand, a fixed percentage (e.g., 40%) of the value is depreciated each year. More information on straight-line and declining balance depreciation can be found in our blog.

How much can one depreciate?

The extent of allowable depreciation depends on the type of asset to be depreciated. Computers are depreciated very quickly because they lose value rapidly and need to be replaced soon. Residential buildings, on the other hand, are depreciated slowly.

Examples of allowable percentage depreciations on the fixed assets of commercial enterprises are: