Afskrivninger is an accounting term that describes the systematic distribution of an asset's value over the period in which the asset is expected to be used in the company. The purpose is to show how the value of a fixed asset – for example machines, buildings, cars or IT equipment – is gradually consumed as the asset is used and worn out.
Why is depreciation used?
Depreciation ensures that the accounts give a true picture of the company's finances. Instead of expensing the entire purchase price of an asset at once, the expense is spread over the expected useful life. This way you match the cost with the income the asset helps to generate.
Methods of depreciation
- Straight line depreciation – the value of the asset is depreciated by a fixed amount each year.
- Saldometoden – a fixed percentage of the remaining value is depreciated, giving higher depreciation at the start and lower later.
- Produktionsmetoden – the depreciation is calculated based on the asset's actual use, e.g. number of units produced or operating hours.
Example
If a company buys a machine for DKK 100,000 with an expected life of 10 years, the straight-line depreciation can be DKK 10,000 per year. In this way, the accounting value of the machine is continuously reduced until it reaches 0 or a possible scrap value.
Significance for accounting and tax
Depreciation affects the income statement as a cost and thus reduces the profit for the year. At the same time, there are tax regulations that determine how much and how different types of assets may be depreciated. These rules may differ from the accounting methods and thus cause differences between accounting and tax.
Short summary
Depreciation is a way of spreading the cost of an asset over several years, so that the accounts reflect both the asset's use and the company's real finances. It is a central element in the annual accounts and in the assessment of a company's profitability and solidity.