What does the term 'depreciation' refer to in accounting?

The term 'depreciation' in accounting refers to the allocation of the cost of a tangible asset over its useful life. This process allows businesses to spread out the expense of an asset over the period it is expected to be used, which matches the cost of the asset with the revenue it generates. This systematic reduction in value is important for accurately reflecting the asset's worth on the balance sheet and for calculating the expense recognition in the income statement.

Through depreciation, businesses can comply with accounting principles that require costs to be matched with revenues, providing a clearer picture of financial performance. It also helps in tax calculation, as depreciation can often be deducted as an expense when determining taxable income. This method reflects the physical wear and tear or obsolescence of the asset, making it a crucial concept in financial reporting and analysis.