Systematic allocation of a tangible asset's cost over the periods expected to benefit from its use.
Depreciation is the accounting process of allocating the cost of a tangible long-lived asset across the periods expected to benefit from its use. It does not mean cash is leaving the business again. It means part of the asset’s recorded cost is being recognized as expense over time.
Depreciation affects profit, asset carrying value, and many performance measures. If it is ignored or estimated poorly, both the income statement and balance sheet can become misleading.
When a business buys equipment, vehicles, or other depreciable property, the cost is usually recorded as an asset first. The cost is then allocated over the asset’s useful life using a method such as straight-line, units of production, or another approach that fits the asset’s pattern of use.
The credit side of the entry often goes to accumulated depreciation, a contra-asset account that reduces the asset’s carrying amount without erasing the original cost record.
Equipment costing 24,000 is expected to provide benefit for 12 years with no salvage value. Annual straight-line depreciation is 2,000:
| Account | Debit | Credit |
|---|---|---|
| Depreciation Expense | 2,000 | |
| Accumulated Depreciation | 2,000 |
That entry reduces current-period profit and increases accumulated depreciation on the balance sheet.
Depreciation is not the same as market-value decline. Accounting depreciation is an allocation method, not a live appraisal. It is also not the same as amortization, which usually refers to intangible assets or loan repayment schedules.