When a company buys construction equipment like excavators, bulldozers, or cranes, they don’t consider it an immediate expense. Instead, they spread the cost over several years. This process is called depreciation. It helps businesses manage their finances better and accurately reflect the value of their assets over time.

What is Depreciation?

Depreciation is the reduction in the value of an asset over time due to wear and tear, aging, or obsolescence. Since construction equipment is heavily used and exposed to tough conditions, its value decreases every year. By calculating depreciation, companies can estimate how long they can use their machines before replacing them.

Why is Depreciation Important?

Accurate Financial Reporting: Depreciation ensures that financial statements show the true value of assets. If a company ignores depreciation, its balance sheet might overstate its assets.
Tax Benefits: Depreciation reduces taxable income. Governments allow businesses to deduct depreciation from their profits, lowering their tax liabilities.
Better Budgeting: Knowing how much equipment value is lost each year helps businesses plan for future replacements or upgrades.
Fair Pricing for Used Equipment: When selling old machinery, depreciation helps determine its current market value.