Depreciation is a principle used in accounting to match revenues with the associated costs to produce that revenue. Often the business operation has to purchase some large piece of equipment to make, store or deliver the asset to the customer. This asset will be used many times over in future sales. Depreciation is a calculation of small percentage of the original price as an expense in the current accounting cycle matching costs to the revenue generated in the accounting period.
The Internal Revenue Service defines a business expense as ‘ordinary’ and ‘necessary’. Ordinary expenses are those costs typically incurred in your industry. A restaurant would not ordinarily purchase vaccines. And a medical practice would not purchase 50 heads of lettuce.
There are various forms of depreciation used in the small business world. In general, depreciation is not required but it is advisable. A small business owner should understand depreciation and the various forms of how to calculate the deduction.
In the world of accounting, there are two types of expenses on the reports widely misunderstood. They are depreciation and amortization. I will try to help the novice gain an understanding of depreciation in this article.
