Depreciation

Depreciation is an accounting method used to allocate the cost of a tangible asset over its useful life. It reflects the gradual reduction in the asset’s value due to wear and tear, age, obsolescence, or usage. Businesses apply depreciation to match the expense of an asset with the revenue it generates over time, ensuring compliance with the matching principle in accounting.

There are multiple depreciation methods, including:

• Straight-line depreciation: Spreads the cost evenly over the asset’s useful life.

• Declining balance depreciation: Applies a higher depreciation rate in the initial years.

• Units of production depreciation: Based on actual usage or output.

Depreciation affects both the income statement (as a non-cash expense reducing taxable income) and the balance sheet (reducing the asset’s book value).