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Purpose and benefits

Depreciation is a basic expense of doing business, reducing a company’s earnings while increasing its cash-flow. It affects three key financial statements: balance sheet; cash-flow; and income (or profit and loss). It is based on two key facts: the purchase price of the items or property in question, and their ‘useful life’.

Depreciation values and practices are governed by national tax laws, which must be monitored continuously for any changes that are made. Accounting bodies, too, have developed standard practices and procedures for conducting depreciation.