Depreciation is a form of an allowance for the wear and tear (exhaustion) of property used in a trade or a commercial enterprise. The idea is to match as well as possible the actual use (utility) of the asset to its change or reduction in fair market value due to that utility.
Accumulated depreciation is the amount identified on the balance sheet as an offset account against the corresponding fixed assets. Accumulated depreciation is the lifetime accumulated amount taken as a deduction on the income statement (profit and loss).
When a small business purchases fixed assets two financially based opposing forces come into play. The first is the financial reporting desire to present information in a fair manner so management can make good financial decisions. The opposing force has to do with taxation. Here the business desires to report less profit to reduce the tax obligation.
The balance sheet serves as an historical report. It identifies the accumulated change in value since inception. The balance sheet is organized into two halves and both sides must be equal in value. In addition, the balance sheet is a snapshot of the financial condition at a single moment in time along the lifetime timeline of the company.
Tangible and intangible are terms with several different meanings. A lot of well educated folks have a difficult time providing an all inclusive definition. Someone once described tangible as ‘something that can be burned’. Well, land is tangible and yet, you can’t burn it. Actually, in Boy Scouts, we teach the boys to use dirt to put out fires! But the best overall definition for these terms that I heard was a synonymous statement made by a Supreme Court Justice when trying to define pornography in relation to art. He said something along the line of ‘I don’t have a definition, but I just know it when I see it’. Basically the gray area for the definition is vast. This is true for these two terms because there are various levels of definitions related to their respective use.
There is the classic college textbook definition. It is straight forward, but it doesn’t really begin to get involved in the gray area definitions. Then there is the more extended definition as used in accounting and customarily in the traditional business setting. Really getting into higher thinking and use of the terms comes into play when discussing value. Finally, there is the relationship to each other with regards to economics and the evolving concept of wealth. They are similar to the theory of the Yin and the Yang of life itself.