Depreciation

Depreciation is the process of allocating the cost of a tangible asset over its useful life, representing the decline in its value due to wear and tear, age, or obsolescence. Depreciation allows businesses to spread the cost of expensive assets, such as machinery, vehicles, or buildings, across several years, aligning the expense with the revenue the asset generates. In accounting, depreciation is recorded as a non-cash expense, reducing taxable income and providing tax benefits.

Example

A company purchases machinery for $100,000, and its expected useful life is 10 years. The company may depreciate the asset by $10,000 each year using the straight-line method.