Depreciation Expense:
The cost to use a piece of equipment during a season, which reflects the decline in value of the equipment. As equipment is used to produce income the value of the equipment is reduced because of wear and tear. Over time the equipment will "wear out" completely and be of no value. The idea is to record those usage costs to match the productive period of the equipment.
For example, you purchase a new tractor for $100,000 and estimate the tractor will be used for 5 years before it is worn out. The depreciation expense of that tractor for one year is $100,000 divided by 5 which equals $20,000 per year.
The cost to use a piece of equipment during a season, which reflects the decline in value of the equipment. As equipment is used to produce income the value of the equipment is reduced because of wear and tear. Over time the equipment will "wear out" completely and be of no value. The idea is to record those usage costs to match the productive period of the equipment.
For example, you purchase a new tractor for $100,000 and estimate the tractor will be used for 5 years before it is worn out. The depreciation expense of that tractor for one year is $100,000 divided by 5 which equals $20,000 per year.
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