An expense in business is something that you pay for to generate sales. Purchasing office supplies, printing marketing brochures, or paying for newspaper advertising are some of the items that you would normally consider as expenses that are necessary for generating business. But about when you buy a computer or machinery equipment or the renovation of a new office of you business? Are these treated as expense as well?
The answer is yes, but you have to allocate the total cost of the expenditure over the useful life of the equipment bought. For example, if you purchased a delivery van for your business, this van loses value from the very first minute that you drive it out of the dealership. It is considered an operational asset in running your business, one that loses part of its value each year that you own until it no longer runs and as no more value to your business. The measure of the loss in value of an asset like your delivery van is known as depreciation expense.
It is important to recognize the importance of recording depreciation. The objective of this is to show the decline in the usefulness of an asset, not a decline in its market value. Depreciation merely reduces the value of an asset in the balance sheet; it does not reduce the cash account or affect the cash flow of a business.