Most 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.
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 3/4 special levies.
For strata corporations, ownership and management become separate tasks. 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 taxation concept of depreciation spreads out the cost of tangible assets over the long-term. Computer equipment is allocated on a declining balance three calendar year straight-line basis; fitness equipment and security systems at 20 percent per year regardless of usage and condition. Typically, a tangible asset is expensed from the fund from which it was budgeted. And a tangible asset is capitalised at cost.
Typically, in reserve fund planning, assets that cost more than $500 are depreciated based on a zero-sum basis from the current fiscal-year.
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 in present-value terms, and not in terms of a decline in its market-value.