Lease accounting: finance lease accounting: finance lessees: balance sheet depreciation (accounting)
Depreciation is defined in FRS 15 Tangible Fixed Assets as
“the measure of the cost the economic benefits of the tangible fixed asset that have been consumed in the period”.
For those UK GAAP entities adopting FRS102, depreciation is defined in the FRS102 glossary as
“The systematic allocation of the depreciable amount of an asset over its useful life”.
Example, if an asset is bought for £10,000 and is expected to have a useful life of 5 years it may be expected to have no value at the end of its life - or (say) £2,000.
If the asset is expected to have no value after 5 years, depreciation will write off £10,000 over the five years.
If it is expected to have a value of £2,000 after 5 years, depreciation will write off £8,000 over the 5 years.
The depreciation must be written off in a systematic way to reflect how the economic benefit is consumed. In practice it is often written off on a straight-line basis (£2,000 or £1,600 a year in this example).
Note that the way in which depreciation is written off is important for tax purposes, see BLM32500. If you think the accounting is not in accordance with GAAP you should consult your local advisory accountant.