Depreciation is the accounting process of allocating the cost of a tangible asset over its useful life. It reflects the gradual wear and tear, aging, or obsolescence of assets such as machinery, vehicles, equipment, or buildings. Instead of recording the full cost of an asset as an expense in the year it’s purchased, depreciation spreads that cost over several years, matching the asset's usage to the income it helps generate.

There are several methods of calculating depreciation, including:

• Straight-line depreciation, where the same amount is expensed each year.

• Declining balance, where a higher expense is recorded in the earlier years.

• Units of production, which bases depreciation on asset usage or output.

Depreciation affects both the income statement (as an expense reducing net income) and the balance sheet (by reducing the asset’s book value over time). It also plays a role in tax planning, as depreciation is a deductible expense, helping reduce taxable income.

It’s important to note that depreciation applies only to tangible fixed assets, not to land or intangible assets like trademarks. Properly recording depreciation ensures accurate financial reporting and helps businesses plan for future asset replacement or upgrades.