Depreciation is a business accounting formula that assigns the cost of tangible assets to their useful life. This calculation allows companies to spread huge financial outlays out over many years, which helps to provide a more reliable source of income. To understand the depreciation formula, it’s important to recognize the three major components: Cost, Residual Value, and Useful Life of an Asset. The formula simply takes the original cost of an asset, subtracts its residual value (the expected worth of an asset at the time of disposal), and divides this remaining number by the total useful life of the asset. This figure tells us how much money to allocate each year in order to spread out the cost for the asset. Understanding this formula can help businesses manage their finances and make informed decisions about future investments.