An accounting term which reflects how much of an asset uses over a period of time.
This affects the value placed to an asset on the balance sheet.
Depreciation is a method of reducing the value of a large asset as it “wears out” over time.
Certain large assets (capital assets) such as buildings or expensive equipment lose value as they age, but nevertheless last for many years. Thus, from an accounting perspective, these capital assets are not used up all at once.
For example, a $100,000 piece of equipment that will last for 10 years does not “cost” the entire $100,000 in the first year it is purchased.
Through depreciation, the full cost of the equipment is spread out gradually while it is in use. One method of depreciation allocates the $100,000 purchase price evenly over the life of the equipment: each year, the equipment will depreciate and lose $10,000 in value.