I just learned that Depreciation is more important to businesses than I thought. The English term "Depreciation" refers to the way accounting gradually deducts the cost of an asset over time instead of deducting it all at once.

Actually, there are two aspects to understand. The first is that the value of an asset decreases over time. The second is spreading out the initial purchase price evenly throughout the period of use.

For example, if a company buys a car for 100,000 baht and expects to use it for 5 years, it should record a depreciation of 20,000 baht per year. This is the Depreciation we’re talking about.

Assets that can be depreciated are mostly vehicles, buildings, office equipment, computers, machinery, and even intangible assets like patents and copyrights. However, land and investments such as stocks and bonds cannot be depreciated.

There are many methods to calculate Depreciation. The straight-line method is the simplest, deducting the same amount each year. It’s suitable for small businesses. The double declining balance method accelerates depreciation in the early years to recover costs faster. The units of production method calculates depreciation based on actual usage.

Another related concept is Amortization, which is the process of amortizing or spreading out the cost over time when you have intangible assets or loans. It involves allocating the expense of a loan or intangible asset over its useful life.

The difference is that Depreciation applies to tangible assets, while Amortization applies to intangible assets. Multiple methods can be used for Depreciation, but Amortization typically uses the straight-line method only.

In fact, understanding depreciation and the English term "Depreciation" is crucial for analyzing EBIT and EBITDA because depreciation expenses are deducted from income, but EBITDA adds them back. When investing or analyzing a company, it’s important to understand this point well.