The concept of book depreciation refers to the way to quantify the depreciation of assets for the accounting of an organization.
In this sense, there are different ways to quantify an amortization, and also, for the same event or the amortization may have different criteria depending on the interested agent (accounting, Treasury ...). Accounting amortization is what companies use to value and depreciate their assets. It usually follows its own or general criteria, depending on the asset to be valued, use, economic sector ...
What the accounting depreciation tries to collect is the use and devaluation of an asset, since over time these lose value, and it is necessary to reflect in the accounting books the fair and proper value that an asset presents at a certain time given its obsolescence . For example, when we buy a cutting machine, it will lose value and possibly capacity over the years, while if it is not amortized, the value of the machine would remain unchanged during its useful life. It is also possible to amortize intangible assets such as software or formulas, which over time lose their value, although in this case amortization is a subjective criterion.
There are two ways of accounting for assets
- Direct method: In the accounting account of the asset, entries are made that underestimate the initial value of the asset. Otherwise, they would be negative values in an asset account.
- Indirect method: It consists of creating an account in which the amortization cost, loss of value, is reflected, so it is an expense account, no entries are made directly on the asset, but in a related account that reduces its value.
Amortization is considered an expense account, so it can be deductible in the payment of taxes, hence its importance in the accounting area. Books must reflect the true image of a company, and without amortization, it would be impossible to adequately assess the health of an organization.
It is recommended to read:
Difference between accounting and financial amortization.