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Depreciation

A cost that occurs when a business writes off the net cost of a fixed asset over its useful life. The net cost of a fixed asset is calculated by subtracting the original cost (ie historic cost) of the asset by its expected value at the end of its useful life (ie its residual value). Assets depreciate for the following reasons: wear and tear, lack of proper maintenance / servicing, technological advancement, and product obsolescence. Assets are depreciated in order to: present a ‘true and fair view’ of the value of the asset in terms of what it is worth at current ‘market’ prices; comply with the matching principle ie the accounting principle that states that the revenue earned must be matched with the costs of earning such revenue during the time period it is earned; provide a source of finance / provision for replacement.

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