What is depreciation?

Depreciation refers to the loss in value of a tangible asset over time due to factors such as wear and tear, age, or obsolescence. This concept is crucial in accounting and financial management, as it allows businesses to allocate the cost of an asset over its useful life, rather than expensing the entire amount upfront. Understanding depreciation is important for accurate financial reporting, as it impacts profit and asset valuation on balance sheets.

By recognizing depreciation, businesses can better reflect the actual value of their assets, manage their financial performance, and make informed decisions regarding capital investments and potential replacements. It serves not only to track asset value over time but also affects tax liabilities, as depreciation can often be deducted from taxable income.