depreciation

Depreciation is the process of allocating the cost of a tangible asset over its useful life. As an asset, like machinery or a car, is used over time, its value decreases due to wear, tear, and obsolescence. Businesses use depreciation to account for this reduction in value on their financial statements, which helps in accurately reflecting profits and asset values. This accounting practice allows companies to spread the initial cost of an asset over several years, aligning expenses with the revenue the asset generates. It’s important for tax purposes and helps in managing investments effectively.