I do NOT understand depreciation. Can somebody help me? I need it explained like a 5 year old.

[Cleita]

7. It's value lost gradually on an item purchased for a business or even personal stuff.

For instance, take a piece of equipment in a restaurant like meat slicer. You figure out how long the item is going to last before it implodes or become outdated. You take the cost of the item and divide that by the number of years you decided it would lose value each year until you reach 0. This is the easiest way although there are other ways of figuring it. Since the depreciation is an expense you can put it on your Income and Expense statement each year for tax reasons. You also reduce the value of the meat slicer on the books each time you take depreciation. It's kind of a false figure though. Because equipment can last longer than expected or can go up in value sometimes, or become obsolete when not expected to. However, you have to use the original figure for accounting purposes in depreciated value until you sell it. Then the worth of the asset on the books may not necessarily match what you get in a sale.