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

[Larry Ogg]

13. If you had a business and bought a brand new company car worth $30,000.00

Lets say your business had enough money to pay cash from the business bank account.

Money in the bank is an asset, so when you bought the company car you exchanged a $30,000.00 cash asset, for a $30,000.00 car asset, witch has the same value as the cash asset.

But lets say the car has a life expectancy of 10 years, you would then divide the $30,000.00 value of the car by 10 years, witch is $3,000.00 a year...

So in a year the car will depreciate by $3,000.00 this is what you can claim on your taxes as a depreciation expense.

The car asset value after a years depreciation is now worth $27.000.00 witch is the same as $27,000.00 cash.

Do this for ten years until the asset value is $00.00

You can also use mileage as a means to depreciate the asset.

You can also borrow the $30,000.00 to purchase the asset, and then you will have $30,000.00 debt as well as a $30,000.00 asset that you would depreciate the same as if you paid cash for it.