What happens to the book value of an asset over time when depreciation is applied?

When depreciation is applied to an asset, its book value decreases over time. Depreciation is an accounting method used to allocate the cost of a tangible asset over its useful life. This allocation results in a reduction of the asset's book value on the balance sheet each accounting period.

The purpose of depreciation is to match the cost of an asset with the revenues it generates, recognizing that as time passes, the asset's utility and value can diminish due to factors like wear and tear, obsolescence, or age. As depreciation expense is recorded, it reduces the asset's value on the balance sheet, leading to a lower book value. Thus, over time, as depreciation is systematically recognized, the book value decreases until it potentially reaches a salvage value, at which point it may not decrease further unless impairment occurs.

This understanding of depreciation allows companies to more accurately reflect the current value of their assets and ensure that financial statements present a realistic view of their financial position.