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Depreciation is a term used in accounting, economics and finance with reference to the fact that assets with finite usefulness lose value over time.

Let us consider an asset that we know will lose value as time passes: a computer. When we purchase a computer we are aware that we will, in all likelihood, need to purchase another in (say) 5 years. Although we tend to think of the cost being lumped at the beginning, it would be more appropriate to spread to cost over it’s useful life. We can deduce that a computer bought for $500 in fact costs $100 per year, assuming it is worth nothing after year 5.

Using the above scenario, a company that buys computers worth $100,000 would indicate the depreciation of these assets year by year as follows. At purchase: $100,000 - Year 1: $80,000 - Year 2: $60,000 - Year 3: $40,000 - Year 4: $20,000 - Year 5: £0