Short definition: Depreciation is an accounting method used to allocate the cost of a tangible asset over its useful life.
Explanation: Depreciation reflects the gradual decrease in the value of an asset due to wear and tear, obsolescence, or other factors. It is a non-cash expense that is recorded on the income statement and reduces a company’s taxable income.
Example: A company purchases a delivery truck for $50,000 with an estimated useful life of 5 years. Using the straight-line method, the company would depreciate the truck by $10,000 each year ($50,000 / 5 years).
Additional information (optional): There are various depreciation methods, including straight-line depreciation, declining balance depreciation, and units of production depreciation. The choice of method can affect a company’s financial statements and tax liability.