How_Money_Works_-_The_Facts_Visually_Explained

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PROFIT-MAKING AND FINANCIAL INSTITUTIONS

Corporate accounting

How it works

Depreciation is used to calculate the declining value

of tangible assets (such as a machine or vehicle). It

is a measure of how much the value of an asset falls

over time, particularly due to use, or wear and tear.

Amortization is a term used in accounting to describe

how the initial cost of an intangible asset (one without

a physical presence, such as a patent) can be gradually

written off over a number of years. Depletion is the

reduction in value of an asset that is a natural

resource. Unlike amortization, which deals with

nonphysical assets, depletion records the fall in

value of actual reserves. It could be applied to coal or

diamond mines, oil and gas, or forests, for example.

❯❯Country differences There

are different ways of allowing for

depreciation, and accounting

methods vary from one country

to another. When working out

how much a company is allowing

for the cost of depreciation, it is

important to know which method

is being used in its accounts.

❯❯Purchasing vs leasing assets

Business owners have to make

a choice between buying assets

that they own but that will fall

in value over time, or leasing

equipment on which they will pay

rent. As they do not own leased

equipment, they cannot record its

depreciation in value over time

and there is no depreciation

charge to be used to reduce the

company’s taxable profit.

WARNING

2 3 4

60 %

the value the

average car

loses after

3 years on

the road

(^5) TIME (YEARS)
$5,000
$9,000
$13,000
$17,000
3 4 5 6 7
4 5 6 7 8 9
TIME (YEARS)
TIME (YEARS)
10
$6.4
MILLION
$7.3
MILLION
$5.5
MILLION $4.6
MILLION $
3.7
MILLION $
2.8
MILLION $1.9
MILLION
$^1
MILLION
$18,000
$15,000
$9,000
$6,000
$3,000
$12,000
US_032-033_Depreciation.indd 33 13/10/2016 16:15