Depreciation and Disposal of Assets

In Chapter 4 we defined fixed assets as those held for continuing use in the business. Fixed assets therefore earn profits for a business over several years, which was our reason for showing them on our balance sheet rather than treating them as an expense in our profit and loss account. We must realise, however, that fixed assets do not last forever, except land, although some, such as buildings, may have very long lives. In view of the above, we should make a charge to the profit and loss account each year equal to the part of the cost which we have used. We call this charge depreciation.