Depreciation is a financial accounting method used to slowly spread the cost of an item or asset over its useful life. It allows companies to recognize the value of that item or asset beyond its purchase price, and enables them to realize the benefits from it gradually. Calculating depreciation involves determining three key components: the estimated useful life of the asset; the estimate of residual value at the end of its life; and the amount attributable to each period of time or year. Various formulas are available to help companies determine their depreciated amount. These include straight-line depreciation, double declining balance, sum-of-years digits, and units-of-production methods. By considering these various depreciation methods, businesses are able to better manage their assets and stay on top of current tax rules.