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What is depreciation?

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Quick answer

Depreciation is the gradual loss of value of an asset over time as it wears out or becomes outdated. In accounting, it spreads an asset's cost across the years it's used, rather than counting it all in the year it was bought.

Key things to understand

  1. It's the decline in an asset's value as it ages or wears out.
  2. Accounting spreads a big purchase's cost over its useful life.
  3. Common for vehicles, machines, computers, and buildings.
  4. It lowers reported profit and can reduce taxes owed.

People also ask

What is depreciation in simple terms?
The way an asset loses value over time, and how that lost value is recorded a bit each year.
Why do businesses use depreciation?
To match an asset's cost to the years it helps generate revenue, giving a truer picture of profit.
What kinds of things depreciate?
Physical assets like cars, equipment, computers, and buildings — things that wear out or become obsolete.