Definition of Depreciation

Depreciation is when an asset is deemed to have reduced in value. No tangible asset can last indefinitely and therefore at some point, the asset will no longer be usable and will have to be recorded as a loss on the income statement. Depreciation allows a firm to allocate a percentage of that loss to different periods.

One of the reasons for using depreciation is so that when a very expensive asset such as a factory is no longer useful and is worthless, the company does not have to record a massive loss in a single period which would drastically affect performance. Depreciation allows this large loss to be allocated to lots of different periods in small amounts.

How to Calculate Depreciation