Depreciation is the accounting method used to spread out the cost of an asset over a period of time, thereby reducing the cost of the asset in the current period. This reflects the loss of value over time of a used item. After the depreciation of an asset it often still has a residual value, meaning it can still be sold for a certain amount after its book value has been written off. It can be calculated as follows: Depreciation = (cost of asset - salvage value)/projected years of use.
Diminution of assets, value adjustments, and depreciation are all forms of internal financing that allow a business to free up capital by reducing the value of its assets, or its inventory.
