Depreciation
   

Long-lived assets are often called fixed assets. Except for land, which you usually use indefinitely, long-lived assets have a limited useful life. The number of accounting periods over which an asset is expected to be useful is called its service life.

In accounting, you debit a portion of the cost of a long-lived asset as an expense in each period of its service life. This portion is called the depreciation expense for the period. The principle is exactly that for prepaid expenses, such as the insurance policy described earlier. A one-year insurance policy provides protection for each of the next 12 months, and 1/12 of the prepaid amount becomes an expense in each of those months. If a long-lived asset has a service life of 120 months, that is, 10 years, a portion of its cost becomes an expense in each of those months. You may want to calculate depreciation expense on the straight-line basis, which is the method used in most entities. In this method, an equal fraction of the asset's cost is debited to Depreciation Expense in each month of the asset's service life. The service life of the asset is usually less than its physical life. Many assets are expected to become obsolete and are no longer of service to the entity, long before they physically wear out. If an asset cost €12,000 and is expected to have a service life of 120 months, 1/120 of the €12,000, or €100, is debited as depreciation expense in each of the 120 months. Plotted on a graph, the depreciation expense each month is a straight line.

If you expect the asset to have a resale value, or residual value at the end of its service life, you can subtract this amount from the original cost in calculating the depreciation.