Depreciation refers to the gradual reduction in the value of a tangible asset over its useful life due to factors such as wear and tear, obsolescence, or age. In accounting and finance, it is a crucial concept that helps companies allocate the cost of an asset over the period it is used, rather than expensing it all at once. This ensures that financial statements reflect a more accurate picture of a companyís profitability and asset value.

The main purpose of recording depreciation is to match the cost of an asset with the revenue it generates over time, adhering to the matching principle in accounting. For instance, machinery used in production will gradually lose efficiency, so its cost is spread over several years to align expenses with output.

There are several methods of calculating depreciation:

• Straight-Line Method: Depreciation is charged evenly each year over the assetís useful life. This is the simplest and most widely used method.
• Written Down Value (WDV) or Declining Balance Method: Depreciation is calculated on the assetís book value, leading to higher depreciation in the earlier years and lower in later years.
• Units of Production Method: Depreciation depends on the assetís actual usage, making it suitable for machinery and equipment.

Depreciation impacts both the income statement and the balance sheet. On the income statement, it appears as a non-cash expense that reduces taxable income. On the balance sheet, the assetís book value declines each year by the amount of accumulated depreciation.

It is important to note that depreciation applies only to tangible fixed assets like buildings, machinery, and vehicles ó not to land or intangible assets (which are amortized instead). In financial analysis, depreciation helps investors understand a companyís asset efficiency, capital expenditure needs, and true earnings capacity.

In summary, depreciation is a systematic accounting process that reflects the loss of asset value over time, ensuring transparency, accurate profit measurement, and better financial planning for long-term sustainability.