Depreciation (wear and tear allowance) denotes the systematic allocation of the acquisition or production costs of an asset over its useful life. In accounting, this is used to record the consumption of value as an expense.
Basics
Economic goods of Fixed assets are generally not recognised as an expense in full at the time of acquisition. Instead, the costs are spread over the period in which the asset is used.
Depreciation causes the carrying amount of an asset to reduce over time, whilst simultaneously creating an expense in the Profit and Loss Account (P&L) originates.
Classification in accounting
Depreciation is a core element of external accounting. It serves to determine profit in a period-appropriate manner by reflecting the consumption of value of an asset over its useful life.
In practice, depreciation is often controlled via fixed asset accounting and then posted in financial accounting. Specific tax-related detailed interpretations or table values are not required here if the focus is on definition and system logic.
Classification in Financial Accounting
Depreciation typically relates to fixed assets and affects the balance sheet and profit and loss account. In accounting, it is recorded as a recurring expense.
Typical billing and accounting logic
- Asset is recorded in the fixed asset register (acquisition/production).
- Depreciation schedule will be filed (useful life, start date).
- Depreciation is periodically booked as an expense.
- The carrying amount of the asset is carried forward in inventory.
Typical procedure
- Recording of the acquisition in fixed asset accounting
- Assignment to the correct investment account
- Defining the service life in the system
- Periodic depreciation booking
- Voting as part of month-end or year-end closing
Practical relevance
A well-maintained asset register simplifies ongoing bookkeeping and the preparation of the annual financial statements. In practice, it is particularly important that assets are fully recorded, correctly accounted for, and consistently updated.
Depreciation is a recurring standard process that is often automated via accounting software.
Typical sources of error
- Asset was not recorded or incompletely recorded in fixed asset accounting
- Incorrect account assignment or incorrect asset account
- Missing or unposted periodic depreciation bookings
- Discrepancies between the asset register and the general ledger (reconciliation errors)
FAQ
AfA stands for Abschreibungen (depreciation).
AfA is the common abbreviation for „Absetzung für Abnutzung“ (wear and tear allowance) and is used in everyday language as a synonym for depreciation.
Is depreciation always a cash outflow?
No. Depreciation is an accounting expense entry and is not automatically linked to a payment. The payment typically occurs upon acquisition; depreciation spreads the expense over the useful life.
Conclusion
Depreciation (AfA) is the scheduled allocation of acquisition or production costs over the useful life of an asset. It is a central process in fixed asset and financial accounting and affects the profit and loss statement and balance sheet.
Brasser Accounting Solutions GmbH is a specialised accounting service provider and part of a corporate group with Quint GmbH (tax consultancy/auditing) and Service Place Årjäng AB (Swedish tax office). BAS exclusively performs services according to § 6 No. 3 and 4 StBerG and does not provide tax or legal advice.
