Depreciation
A rules-based allocation of asset cost—not a direct measure of physical wear, replacement cash needs, or guaranteed tax savings.
Depreciation is the systematic allocation of a tangible asset depreciable amount over its estimated useful life under a specified accounting or tax framework. Methods, useful lives, residual values, componentization, impairment, and tax treatment can differ from economic wear and from cash spending.
Frequently Asked Questions
Is depreciation a real economic cost?
It is a noncash accounting allocation in the current period, but the underlying asset may require maintenance or replacement. Accounting depreciation does not by itself measure future capital spending, physical deterioration, or economic obsolescence.
Does depreciation create a guaranteed tax shield?
No. Tax deductions depend on jurisdiction, asset eligibility, basis, method, placed-in-service date, limitations, taxable income, recapture, and current law. A deduction changes tax timing or liability only when applicable.
Should capex equal depreciation?
No. Capex and depreciation can differ because of growth, inflation, asset mix, acquisitions, disposals, construction timing, useful-life estimates, and leased assets. Their relationship requires multi-period and business-specific analysis.
Why can book and tax depreciation differ?
Financial reporting and tax systems pursue different objectives and may prescribe different methods, lives, conventions, incentives, and impairment treatment, creating temporary or permanent differences.