I often see people ask about depreciation, but they still don't really understand what it is, so I’ll try to explain based on my understanding.

Depreciation is the decrease in the value of an asset over time. For example, a company buys a computer for 100,000 baht, but this machine will be used for about 5 years. After that, its value will gradually decline. This is the basic concept of depreciation.

Why is it important to understand this? Because when accountants calculate the company's profit, they need to subtract depreciation. This affects the income figures shown in the annual financial statements. If a company has many fixed assets, the depreciation will be high, which might make the net profit appear lower than it actually is.

Assets that can be depreciated must belong to you, be used in the business, have a determinable useful life, and be expected to last longer than 1 year. Vehicles, buildings, furniture, computers, machinery, patents, copyrights—all of these can be depreciated. However, land does not depreciate because its value usually does not decrease.

Regarding the calculation methods, the most common one is the straight-line method. It’s very simple: if you buy a car for 100,000 baht with a useful life of 5 years, you divide 100,000 by 5, resulting in 20,000 baht per year. Each year, the same amount is deducted.

There are other methods too, such as the double-declining balance, which depreciates more in the first few years and then decreases over time. This method is suitable for businesses that want to recover the asset’s value quickly or units of production, which calculate depreciation based on actual usage.

This reminds me of EBIT often. EBIT stands for Earnings Before Interest and Taxes, calculated by adding interest back in but not adding depreciation. EBITDA, on the other hand, adds back both depreciation and amortization.

Speaking of amortization, it’s slightly different from depreciation. Amortization applies to intangible assets like copyrights, patents, or when you borrow money. It shows that you’re repaying a loan by making monthly payments of principal and interest. Initially, interest is high, but over time, as the principal decreases, the interest also decreases.

The main difference is that depreciation applies to tangible assets, while amortization applies to intangible assets and loans. There are various ways to calculate depreciation, but most amortization uses the straight-line method.

Understanding these concepts really helps. If you want to analyze a company's financial statements or plan your own finances, knowing how depreciation and amortization work will give you a better grasp of the figures in the financial reports and balance sheets.