What is depreciation in accounting?

Depreciation in accounting refers to the systematic allocation of the cost of a tangible asset over its useful life. This concept recognizes that tangible assets, such as machinery, vehicles, and equipment, do not last indefinitely and their value diminishes as they are used in business operations. Instead of recording the entire purchase price of an asset as an expense in the year it was acquired, depreciation spreads this cost over multiple periods, aligning the expense with the revenues the asset generates.

This process not only reflects the reduction in the asset's value over time but also adheres to accounting principles such as the matching principle, which aims to match expenses with the revenues they help generate. By doing so, it provides a more accurate representation of a company's financial performance and condition on its income statement.

The other alternatives do not capture the correct essence of depreciation. For instance, the idea that depreciation represents an increase in an asset's value contradicts its fundamental principle, as assets typically lose value over time. Similarly, considering depreciation a one-time expense for purchasing equipment misrepresents the process; depreciation is ongoing, reflecting the use and wear of the asset. Lastly, while depreciation can be relevant for tax calculations, its primary purpose in accounting is the allocation of an asset's cost