Depreciation
Reduction in asset value over time due to use, wear, age, obsolescence.
Formula
Depreciation (Straight-Line) = (Cost − Residual Value) ÷ Useful Life
Real World
When Apple buys manufacturing equipment for £10m with a 5-year lifespan, it records £2m depreciation annually, reducing reported profit each year even though no cash leaves the business.
Exam Focus
Remember depreciation reduces profit but is a non-cash charge — a common mistake is treating it as a cash outflow in cash-flow questions.
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