How is depreciation commonly calculated?

Depreciation is commonly calculated by dividing the total value of an asset by its expected lifespan and reducing the value yearly. This method, often referred to as straight-line depreciation, evenly allocates the cost of the asset over its useful life, making it straightforward to account for the asset's depreciation on financial statements. The yearly reduction in value reflects the asset's wear and tear or obsolescence over time, allowing businesses to match costs with the revenues generated by using the asset.

This approach provides a clear and consistent way to track the reduction in value, which is important for financial reporting and tax purposes. It contrasts with other methods that may rely on variable factors such as market conditions or performance metrics. While those factors can be relevant in some analyses, they are not direct methods of calculating depreciation as defined in accounting standards.