Depreciation in English and Business Asset Management

Understanding Depreciation in English: It’s Not as Difficult as You Think

If you are a business owner and have recently purchased machinery, vehicles, or expensive equipment, you need to know that the value of these assets gradually decreases over time. The term Depreciation (depreciation) refers to this reduction in value that accountants incorporate into financial statements.

Most of a business’s assets will wear out over time, whether used frequently or not. This depreciation calculation helps the company spread out the cost of assets over their useful life instead of recording the entire expense in the year of purchase.

How Depreciation in English Affects Financial Reporting

When an accountant calculates depreciation in the income statement, it directly impacts EBIT (Earnings Before Interest and Taxes). Depreciation is recorded as an expense, which reduces profit or net income.

Here’s the point to watch out for: if you compare the profits of two companies in the same industry, but one has more fixed assets, its depreciation expense will be higher, making its accounting profit appear lower—even if their actual operations are similar.

This is why investors often prefer to look at EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), which adds back depreciation, providing a clearer view of the company’s true earning capacity.

Examples of Depreciation Calculation from Least to Most

Case 1: Company purchasing a vehicle

Suppose your company buys a truck for 100,000 THB, expected to be used for about 5 years.

Using the straight-line method, annual depreciation = 100,000 ÷ 5 = 20,000 THB per year

Each year for 5 years, the company records 20,000 THB depreciation expense in its financial statements.

Case 2: Assets with value appreciation potential

Not all assets are depreciable, such as:

• Land – generally does not depreciate and may even appreciate in value
• Collectibles (art, coins, souvenirs) – cannot be depreciated
• Investments (stocks, bonds) – are not considered fixed assets for depreciation purposes

How Many Methods Are There to Calculate Depreciation in English?

1. Straight-line Method(

The simplest and most widely used method. You just divide the asset’s value by its expected useful life.

Advantages: Easy, few errors, suitable for small businesses.

Disadvantages: Does not account for higher wear and tear in the early years, which may not reflect reality.

) 2. Double-Declining Balance Method###

This method records a higher depreciation in the first year and then gradually decreases. Suitable for assets that wear out quickly.

Advantages: Reflects reality, helps reduce taxes in the initial years.

Disadvantages: More complex; companies that have incurred losses may not benefit from this depreciation deduction.

( 3. Declining Balance Method)

A form of accelerated depreciation, where depreciation is twice the straight-line rate.

4. Units of Production Method(

Calculates depreciation based on actual usage, such as hours operated or units produced.

Advantages: Very accurate if usage can be tracked well.

Disadvantages: Difficult to estimate and monitor; not suitable for all businesses.

What Is Amortization )Amortization### and How Is It Different from Depreciation?

Amortization refers to spreading out the cost of:

1. Intangible assets (patents, copyrights, trademarks)
2. Liabilities (e.g., loan repayments)

Example: A company purchases a patent for 10,000 THB, expected to be used for 10 years = 1,000 THB per year

( The main difference between depreciation and amortization:

Why Do EBIT and EBITDA Differ?

EBIT = Earnings Before Interest and Taxes (profit before interest and taxes)

• Subtracts depreciation and amortization
• More specific; reflects true profit after all expenses

EBITDA = Earnings Before Interest, Taxes, Depreciation, and Amortization

• Adds back depreciation and amortization
• Used to assess earning potential without accounting policies affecting expenses

For investors, EBITDA is often preferred because it better compares companies across different countries or with varying asset bases.

Summary: Why Is It Important to Understand Depreciation in English

Depreciation and amortization are not financial secrets but tools to allocate costs fairly. If you are a business owner or investor, understanding these methods will help you read financial statements more accurately and make smarter decisions.