Until not too long ago capital expenses were treated as operating expenses by sole owners.
Capital expenses were deducted in the year that they were paid – like special levies.
With corporations, ownership and management become separate tasks and the need for accountability and measuring profitability made the concept of depreciation a must, for assets with specified useful lives, while the operating budget items are best understood as inventory.
The concept of depreciation evens out the cost of capital assets – of tangible assets over the long-term.
Typically, in reserve fund planning, assets that cost over $1,000 are depreciated.
Furthermore, all common assets except land depreciate. The main factors of depreciation are physical and functional. The actual use of assets determines physical deterioration. The obsolescence of common assets determines their functional deterioration. Depreciation reduces the value of the assets not the value of accounts or of cashflows.
Physical deterioration of a component is dealt with in terms of full replacement, partial replacement, update and allowance categories in the component inventory.
Functional deterioration of a component is dealt with the upgrade category in the component inventory.
Considering deterioration allows us to keep stock of the decline in the usefulness of an asset and not a decline in its market-value.