What are depreciations? Purpose and causes

The content of the post addresses the question "What are depreciations?" and also provides answers to its purpose and causes.

Fixed assets such as machines, vehicles, furniture, computer systems, which are used over several years, are booked as an increase in assets at the time of purchase. The fixed assets are recorded at the acquisition cost (purchase price plus delivery and installation costs). Over time, the value of these fixed assets decreases. The depreciation of these fixed assets is recorded as an expense. In reality, the assets continuously depreciate. For practicality reasons, in accounting, these losses in value are generally only recorded at the end of a period.‍

Causes for the decrease in value of fixed assets principally include:

• Wear and tear through use (e.g., in a vehicle)
• Technological advancement (e.g., in a computer system)

The following purposes are pursued through depreciations:

• Fixed assets should appear at the correct value in the balance sheet.
• Profit or loss should be accurately determined through the income statement for the period.
• To ensure liquidity for the replacement of the fixed assets.