How is total depreciation determined?

Total depreciation is determined by calculating the difference between the original purchase price of an asset and its estimated value after a specified number of years. This represents the amount the asset has decreased in value due to factors such as wear and tear, obsolescence, or market changes.

When you take the purchase price and subtract the value after n years, you are effectively measuring how much value has been lost over that period. This net loss in value is recognized as total depreciation, which reflects the asset's diminished worth.

In the context of finance and accounting, understanding this concept is crucial as it impacts profit calculations, asset evaluation, and tax deductions. Therefore, the method of subtracting the residual value from the purchase price accurately reflects the total depreciation incurred over the asset's useful life.