How is depreciation defined?

Depreciation is defined as the systematic allocation of the cost of a tangible asset over its useful life. This means that instead of recognizing the entire cost of the asset in the period it was purchased, businesses gradually spread the expense over several periods. This approach aligns the expense recognition with the revenue generated from using the asset, adhering to the matching principle in accounting.

This systematic allocation allows a company to reflect the use and aging of its assets on its financial statements accurately. By doing so, it provides a more realistic view of the company’s financial position and performance over time. Depreciation thus affects both the balance sheet and income statement, reducing the asset's book value while also recording a depreciation expense that lowers net income for the period.