Definition
Depreciation is the decrease in an asset's value over time due to wear and tear, obsolescence, or age. In accounting, depreciation is an expense that spreads the cost of an asset over its useful life. For consumers, depreciation is most commonly associated with vehicles, which can lose 20-30% of their value in the first year alone. Real estate generally appreciates rather than depreciates, but rental properties can depreciate for tax purposes.
Formula
Straight-line depreciation method where Asset Cost is the purchase price, Salvage Value is the expected value at end of life, and Useful Life is the expected years of use.
Example
Car Depreciation Example
If you buy a new car for $35,000, it may only be worth $25,000 after one year—a $10,000 loss. After five years, that same car might be worth only $14,000, having lost 60% of its value. This is why buying a slightly used car can be financially smarter than buying new.