How is depreciation defined in accounting?

Depreciation in accounting refers specifically to the process of allocating the cost of a tangible asset over its useful life. This systematic allocation allows businesses to match their expenses related to the asset with the revenues that the asset helps to generate. By spreading the cost over the estimated useful life of the asset, companies can reflect a more accurate profit margin on their financial statements and avoid large fluctuations that could impact their financial performance.

This approach provides a way for companies to account for the wear and tear, obsolescence, or usage of their physical assets, ensuring that their financial statements accurately represent their economic reality. This concept is foundational in accounting, as it aids in financial reporting and tax calculation, and informs stakeholders about the company’s asset management and operational efficiency.