What is Depreciation? Methods of Calculating Depreciation

It is inevitable that valuable assets acquired by businesses as fixed assets will be subject to wear, tear, and obsolescence over time. As a result, businesses incur depreciation expenses. Depreciation refers to the reduction in the value of assets over time and is recorded in a company's financial statements.

Depreciation, also known as a wear and tear allowance, allows businesses to accurately reflect the decline in the value of their valuable assets and ensures a true representation of their financial status. This enables companies to determine how much of their asset’s value has depreciated and to assess the real value of these assets in their accounting records.

The concept of depreciation is critical for businesses to maintain successful operations and to analyze their financial position correctly. Companies facing wear and deterioration in their assets can calculate depreciation expenses to determine the real value of those assets and reflect them accurately in their financial statements.

Definition of Depreciation

Depreciation is an expense that arises from the decline in value of tangible and intangible fixed assets owned by a business over time due to wear, aging, or obsolescence. In accounting, it refers to the systematic allocation of the asset's cost over a specific period. Businesses use depreciation to gain tax advantages, reflect true costs, and calculate the useful life of their assets.

Depreciation rates vary depending on the type and useful life of the asset. For example, a building might have a depreciation rate of 2% per year, while machinery could be depreciated at 10% annually. There are also several methods used for depreciation calculation, such as the straight-line method and the declining balance method.

What Are the Methods of Calculating Depreciation?

Depreciation represents the decrease in value of fixed assets over time, and businesses use various methods to calculate this decrease. One of the most common methods is the Straight-Line Method, which involves depreciating an asset with a known cost and useful life by an equal amount each year. For example, if an asset costs 10,000 TRY and has a useful life of 5 years, the annual depreciation would be calculated as:
10,000 x 1/5 = 2,000 TRY per year

Another commonly used method is the Accelerated Depreciation Method. In this method, higher depreciation expenses are recognized in the early years of the asset's life. For example:
100 / 5 x 2 = 40 TRY in the first year.
In the second year, depreciation is calculated on the remaining value after the first year:
(100 - 40) / 5 x 2 = 24 TRY.
This cycle continues each year based on the remaining book value.

A special method used for extraordinary cases is the Exceptional Depreciation Method. This is applied when the value of fixed assets is partially or completely lost due to extraordinary events such as earthquakes, fires, or floods. In such cases, accelerated depreciation is necessary to reflect the unexpected value loss in the company’s financial statements. For example, if a business suffers significant damage to its factory in a natural disaster, it can quickly depreciate the affected assets and update their book values accordingly.

What Are the Conditions for Allocating Depreciation?

To allocate depreciation, the fixed assets must have characteristics that allow for value loss over time. In this context, the essential requirement is that fixed assets owned by the business must be subject to depreciation at the rates determined for the year. According to accounting and tax regulations, it is important to include fixed assets listed in the inventory at the valuation date in the depreciation calculation.

Another key condition is that the asset must be intended for use in the business for more than one year. In this case, the value of fixed assets is reduced annually based on predetermined depreciation rates, and this loss in value is reflected in financial statements. By calculating depreciation correctly, businesses maintain the transparency and accuracy of their financial reporting. Depreciation plays a vital role in managing a company's financial and tax liabilities.

What is a Depreciation Schedule? How Is It Prepared?

A depreciation schedule is a financial tool used to determine how the value of a company’s assets will decline over time. This schedule shows how an asset’s value decreases during its depreciation period and outlines how long the company intends to use the asset. It serves as an important reference to better understand the company’s financial performance.

To prepare a depreciation schedule, the business must first identify its assets and determine each asset’s cost, estimated useful life, and salvage value. Then, the appropriate depreciation rate is applied to each asset to calculate the depreciation expense. As a result of these calculations, a depreciation schedule is created showing the depreciation entries for each asset over a defined period.