How is depreciation defined in accounting?

Depreciation in accounting is defined as the systematic allocation of the cost of an asset over its useful life. This process helps to match the expense of using the asset with the revenues it generates over time, following the matching principle of accounting. By allocating the cost in this manner, businesses can accurately reflect the asset’s consumption and the wear-and-tear that occurs during its useful life, allowing for a more realistic view of both the company's financial health and profitability.

The concept of depreciation also serves to spread out the initial cost of acquiring the asset, making it more manageable for financial reporting. This allocation can take various methods, such as straight-line depreciation or declining balance, depending on how the business chooses to account for the asset’s expense over time.

In contrast, immediate expense recognition upon purchase does not accurately capture the notion of asset use over time. Additionally, while total loss of value might occur at the end of an asset's life, depreciation specifically refers to the gradual process of allocating that value over time instead of just measuring its overall worth. Finally, estimating future repairs on an asset relates more to maintenance and upkeep rather than the depreciation of the asset itself. Thus, the focus remains on how the asset’s cost is systematically spread out in relation to its