Tx14. Depreciation - $100 per month

What do we have more of, or perhaps less of, as a result of this transaction?

Depreciation is the loss in value of a physical asset. When an asset loses value, that loss in value is recorded as an expense. When a physical asset loses value, say a motor vehicle for example, then that loss in value is recorded as an expense of the period in which the loss in value occurred.

There are a few myths about depreciation:

• That depreciation represents 'saving up' for the asset replacement. This myth probably comes about because the depreciation decreases the profit for the period, but without a consequent cash impact (they are forgetting the cash was paid when the asset was acquired). Once the vehicle is fully depreciated and it is time to replace it, the existence of an accumulated depreciation account does not ensure that there will be sufficient cash to acquire a replacement vehicle. Even if the organisation set aside physical cash in the amount of each year's depreciation for that asset, it is likely that the replacement will be more expensive.
• Depreciation is a non-cash expense. This one comes about because the movement of the cash (for the purchase of the asset) typically happens at the commencement of the asset's life, and the depreciation then continues each year of the asset's life. It is only the extended length of time between the cash movement and the incurrence of the expense that makes depreciation different from any other expense.