Taxes

• Businesses like depreciation because it helps lower their tax bills. Depreciation is a deductible expense and reduces the taxable income a company has. As an example, you purchase a computer for $1000 and after one year it depreciates $250. If the company's revenue is $10,000, the $250 gets deducted as a business expense, reducing the taxable income down to $9,750, which results in a savings to the company.
  
  

Durable Goods

• Durable goods are usually larger capital purchases that you plan on using for an extended period within your business. Large pieces of equipment, automobiles, computers and office furniture are all considered durable goods. These items lose value, or depreciate, over time due to wear and tear and obsolescence. If you buy used automobiles or equipment, then depreciation is a huge benefit to you, as you can get slightly used equipment at a steep discount.
  
  

True Value

• Established accounting principles form the basis for depreciation, and you can apply it in a couple of different ways. One option, and probably the easiest to understand, is straight line where you depreciate the same amount each year for the life of the item. Other options use different depreciation rates with high depreciation the first couple of years and then lower in later years. The problem with these forms of depreciation is that they don't consider what the item is actually worth. As an example, a car that you only drive to the grocery store once per week is worth much more than one that you drive hundreds of miles each week. When calculating depreciation, you don't take into account these outside factors; the value of an item is simply calculated by how old it is.
  
  

Functional Obsolescence

• Some products, like electronics, can become obsolete almost as soon as you buy them. This means that new and better products come to market very quickly and frequently. Depreciation does not show this, so you will have equipment on your books that you may not even be using.