Why do companies write off depreciation?

Depreciation: definition and reasons

To write off something means to reduce the value of an object. Cars, electrical appliances, contracts and entire properties can be depreciated. This often happens in companies and is particularly important for the self-employed and entrepreneurs, as savings can be made on annual income tax through depreciation. This is attractive for many companies. There are various reasons for depreciation. Depending on the situation, these can be of an economic, technical or legal nature.

Depreciation: definition

Depreciation should spread the acquisition and production costs over the years of use and reduce the profit of a company as an expense. Depreciation is regulated in German law in Section 253 of the Commercial Code. In corporate accounting, depreciation means the scheduled or unscheduled reduction in an asset or property.

Depreciation is closely related to the depreciation of company assets and is reflected in a company's balance sheet. A depreciation is usually determined from a business perspective. The opposite of a write-down is the write-up. Companies take advantage of this change in assets if too many write-offs were made in previous years.

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Reasons for a write-off

The reasons for a write-off can be varied. There are three main reasons why assets are depreciated. These are causes of a technical nature, economic reasons or legal circumstances.

The technical causes of a depreciation can be normal wear and tear, due to heavy use, or extraordinary wear and tear, for example in the event of an accident. For example, a car wears out through use and can become a total economic loss through accidents.

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Economic reasons are another criterion for depreciation that occurs as a result of bad investments or shifts in demand. Inefficiency, for example in the case of technical progress, can also be a reason for depreciation. This can happen quickly with electronic devices such as cell phones, televisions or laptops, the technology of which is developing so rapidly that models can become obsolete after a short time.

Legal causes are the third reason for depreciation. This can happen, for example, when property rights expire, for example in the case of patents or licenses, or when contracts expire, such as rental, leasing or leasing contracts. Legislative measures can also be responsible for a write-off.

Example of a depreciation

A company purchases ten new computers on January 1, 2013 for a total net amount of € 10,000. These are the one-time acquisition costs.

The estimated useful life of these PCs is five years. A so-called depreciation plan now distributes the falling value of the devices, which is caused by wear and tear and daily wear and tear, linearly over the five fiscal years of use.

This means that from 2013 to 2017 the company can record profit-reducing depreciation of € 2,000 per year. Because the acquisition costs are spread over the years, they reduce the profit, as they are booked as an expense. This reduces the income tax to be paid and is therefore an attractive approach for the self-employed and entrepreneurs when purchasing equipment.

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