Depreciation

Depreciation (Definition)

Depreciation is the allocation of the cost of an asset over a period of time for accounting and tax purposes.

Key aspects of depreciation include:

1. Represents the decrease in value of tangible assets over their useful life
2. Methods include straight-line, declining balance, and units of production
3. Affects both the balance sheet (reducing asset value) and income statement (as an expense)
4. Used to match the cost of an asset to the revenue it generates over time
5. Important for tax purposes, often allowing for deductions
6. Helps in planning for asset replacement and capital expenditures
7. Different depreciation methods can significantly impact financial statements

Understanding depreciation is crucial for accurate financial reporting and effective asset management in businesses.