How do you find the provision of depreciation?

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pnrjulius eNotes educator| Certified Educator

Provision of depreciation is an accounting method that is used in most countries to deal with the fact that most forms of physical capital (e.g. machines, computers, robots) decline in value over time. It allows businesses to include depreciation as an "expense" that businesses incur, which affects how their profits are reported and taxed.

Without provision of depreciation, balance sheets would overestimate the value of a company, because they would essentially be assuming that everything the company owns is worth as much as it was when they bought it. They would also make even a good investment look like a bad idea, as the profits of the company would fall every time you buy a new asset.

On an accounting statement, provision of depreciation is generally recorded in two ways:

Depreciation Expense, where the loss in value of an asset that occurred during this accounting period is simply recorded as an expense, as if it were literally money that had to be paid out this accounting period.

But we also want to keep track of the current value of the asset, which brings us to the other part, Accumulated Depreciation. The accumulated depreciation is the total lost value of the asset over the whole time it has been owned.

So for example if you buy a $10,000 asset and depreciate it linearly over 5 years, you record a depreciation expense of $2000 each year, but the accumulated depreciation is $2000, then $4000, then $6000, then $8,000, and finally $10,000, at which point you stop adding depreciation expense.