Corporatefinanceinstitute com 1 The Corporate Finance Institute Accounting For more eBooks please visit

corporatefinanceinstitute.com
40
The Corporate Finance Institute
Accounting
Depreciation of Assets 
When a long-term asset is purchased, it is often capitalized instead 
of being expensed in the given period. This is because that asset will 
generally still be economically useful and generate returns beyond 
that period, so expensing it in each period will overstate the expense 
in that period and understate them in all future periods. To avoid this, 
depreciation expense is used to better match the expense of a long-
term asset to the revenue it generates.
There are different methods used to calculate depreciation expense, 
and the type of depreciation accounting used is generally selected 
to match the nature of the equipment. For example, for vehicles that 
depreciate faster in the first few years, an accelerated depreciation 
method is often chosen.
To learn more, please 
check out our free online 
accounting courses
View courses

---

corporatefinanceinstitute.com
41
The Corporate Finance Institute
Accounting
Depreciation expense methods:
•
Straight-line depreciation
•
Declining Balance (Accelerated depreciation)
•
Units-of-production
Straight-line depreciation
This is the most commonly used method of depreciation, and is also 
the easiest to calculate. This method simply takes an equal depreciation 
expense over the useful life of the asset. Periodic Depreciation Expense 
= (Fair Value – Residual Value) / Useful life of Asset. For example, 
Company A purchases a building for $50,000,000 to be used over 25 
years with no residual value. Depreciation expense is $2,000,000, which 
is found by dividing $50,000,000 by 25.