Have you ever come across the word depreciation and wondered what it actually means? Depreciation is a common term in finance, accounting, business, and everyday life, but its meaning can change slightly depending on the context in which you see it.
Depreciation generally means a decrease in the value of something over time. In accounting, it refers to the process of spreading the cost of a tangible asset, such as a car, machine, or building, over its useful life. In everyday use, it can simply describe something becoming less valuable as it gets older, wears out, or becomes outdated.
Examples:
- The car experienced significant depreciation after several years of use.
- Businesses record depreciation on certain long-term assets.
The confusion is understandable. People often search for depreciation meaning, what does depreciation mean, depreciation definition, or meaning of depreciation in accounting because the word has both a general and a specific financial meaning. And here’s the kicker: depreciation doesn’t always mean that money is physically lost or paid out. In accounting, it’s a way of recognizing an asset’s cost over time.
In this guide, you’ll learn the complete Depreciation Meaning, including its definition, pronunciation, origin, examples, synonyms, and usage. You’ll also discover what depreciation means in accounting, finance, and everyday English, along with simple examples to help you understand the term clearly.
What Does Depreciation Mean?
Depreciation generally means a reduction in value, usefulness, or worth over time.
Imagine buying a brand-new car. The car has a certain market value when you purchase it. After several years of driving, it may have more miles, more wear, and an older model year. As a result, you may no longer be able to sell it for the amount you originally paid.
That decline is depreciation in the everyday sense.
The concept also applies to business assets. A company might purchase a machine for $50,000 and use it for several years. The machine gradually wears out and eventually needs replacement. Accounting doesn’t usually treat the entire $50,000 as an expense in the year of purchase. Instead, the cost is allocated over the periods in which the business expects to use the machine.
The exact accounting treatment depends on the applicable accounting framework and the asset’s circumstances. Under IAS 16, for example, the depreciable amount of an asset is allocated systematically over its useful life.
Depreciation Meaning in Simple Words
In simple English, depreciation means losing value over time.
For example:
A $30,000 car may be worth only $18,000 several years later because of age, mileage, condition, and market demand.
The $12,000 difference represents a decline in the car’s market value. That doesn’t automatically mean the accounting depreciation for the car equals $12,000. Market-value changes and accounting depreciation are different concepts.
Depreciation Definition
A useful general definition is:
Depreciation is the decline in an asset’s value or the systematic allocation of its depreciable cost over its useful life.
The first part describes ordinary use of the word. The second describes its technical accounting meaning.
That distinction matters because people often use “depreciation” to mean any fall in price. Accounting uses the term much more precisely.
Depreciation Meaning in Accounting
In accounting, depreciation is not simply an estimate of what an asset could sell for today.
Instead, it is a method of recognizing the cost of a long-term tangible asset over the periods in which the asset provides economic benefits.
Suppose a company buys manufacturing equipment for $100,000. The company expects the equipment to remain useful for five years and estimates that it will be worth $10,000 at the end of that period.
Under a simple straight-line approach, the company would allocate the $90,000 depreciable amount over five years.
Depreciable amount = $100,000 − $10,000 = $90,000
Annual depreciation = $90,000 ÷ 5 = $18,000
The business would therefore recognize $18,000 of depreciation expense per year under this simplified example.
Accounting standards can require different methods, estimates, conventions, and treatments depending on the circumstances. IAS 16 states that the depreciable amount is allocated systematically over the asset’s useful life and that useful life and residual value should be reviewed at least at each financial year-end.
Example of Depreciation in Accounting
Consider this machine:
| Item | Amount |
| Purchase cost | $50,000 |
| Residual value | $5,000 |
| Useful life | 5 years |
| Depreciable amount | $45,000 |
| Annual straight-line depreciation | $9,000 |
The calculation is:
($50,000 − $5,000) ÷ 5 = $9,000
After one year, accumulated depreciation would be $9,000 under this simplified example.
After three years:
$9,000 × 3 = $27,000 accumulated depreciation
The machine’s carrying amount would therefore be:
$50,000 − $27,000 = $23,000
That $23,000 is an accounting carrying amount. It isn’t necessarily what the machine would fetch if the company sold it.
Depreciation Expense vs. Accumulated Depreciation
These two terms sound similar, but they aren’t the same.
Depreciation expense is the amount recognized for a particular accounting period.
Accumulated depreciation is the total depreciation recognized on an asset from the time depreciation began through the reporting date.
For example:
| Year | Depreciation Expense | Accumulated Depreciation |
| 1 | $9,000 | $9,000 |
| 2 | $9,000 | $18,000 |
| 3 | $9,000 | $27,000 |
| 4 | $9,000 | $36,000 |
| 5 | $9,000 | $45,000 |
The basic relationship is:
Book value = Original cost − Accumulated depreciation
This is why accumulated depreciation is called a contra-asset account. It offsets the asset’s recorded cost rather than representing a separate liability.
Depreciation Meaning in Economics
Economics uses depreciation in a slightly different context.
In economics, depreciation refers to the decline in the value of capital goods as they age or become less useful. OpenStax defines it as “the process by which capital ages over time and therefore loses its value.”
Capital goods include things such as:
- Machinery
- Factory equipment
- Commercial vehicles
- Buildings
- Computers
- Production systems
- Other durable assets used to produce goods and services
Consider a factory that owns a machine worth $200,000 when new. After several years, the machine may have experienced physical wear, technological obsolescence, and reduced efficiency.
Its productive value can fall even if the machine still works.
This matters in economic analysis because an economy cannot treat every investment in machinery as a permanent addition to productive capacity. Some existing capital wears out while businesses create new capital.
Example of Depreciation in Economics
Suppose a bakery buys a commercial oven for $20,000.
The oven helps produce bread and pastries for several years. Eventually, its heating elements deteriorate and newer ovens become more efficient.
The bakery may replace it with a newer model.
From an economic perspective, the original oven has undergone depreciation because the capital stock has aged and lost value or productive usefulness.
This is different from a business’s exact accounting depreciation charge. Economic depreciation and accounting depreciation can use different concepts and estimates.
Depreciation Meaning in Finance
In finance, depreciation is important because it affects several measures used to analyze a business.
It can reduce:
- Reported operating profit
- Pre-tax income
- Net income
- The carrying value of assets
- Certain tax measures, depending on the applicable tax rules
At the same time, depreciation is generally a non-cash expense.
That sounds contradictory at first. It isn’t.
A company pays cash when it buys an asset. Later, it records depreciation to allocate that asset’s cost over time. The depreciation entry itself doesn’t normally require another cash payment.
That’s why financial analysts often add depreciation back when calculating certain cash-flow measures.
Why Depreciation Matters in Financial Analysis
Suppose two companies have identical sales and operating costs except that one owns expensive machinery while the other rents equipment.
The company that owns the machinery may record substantial depreciation expense. That expense can reduce accounting profit even though the company isn’t paying the depreciation amount in cash during that period.
This is one reason analysts look beyond net income when examining a company’s financial performance.
However, depreciation shouldn’t simply be ignored. It represents the accounting recognition of an asset’s cost and can reflect the economic reality that equipment eventually needs maintenance, replacement, or modernization.
Depreciation Meaning in Mathematics
In mathematics, depreciation describes a decrease in a value over time.
The decrease can happen by a fixed amount or by a fixed percentage, depending on the model.
For example, suppose a machine worth $10,000 loses $1,000 of value each year.
The values might look like this:
| Year | Value |
| 0 | $10,000 |
| 1 | $9,000 |
| 2 | $8,000 |
| 3 | $7,000 |
| 4 | $6,000 |
| 5 | $5,000 |
That’s a straight-line decrease.
Now imagine the asset loses 20% of its remaining value each year.
The calculation becomes different:
| Year | Approximate Value |
| 0 | $10,000 |
| 1 | $8,000 |
| 2 | $6,400 |
| 3 | $5,120 |
| 4 | $4,096 |
| 5 | $3,277 |
The second example demonstrates reducing-balance depreciation. The percentage applies to the remaining value rather than the original amount each time.
Straight-Line Depreciation Formula
The basic straight-line formula is:
Annual depreciation = (Cost − Residual value) ÷ Useful life
For example:
- Cost = $20,000
- Residual value = $2,000
- Useful life = 6 years
Therefore:
($20,000 − $2,000) ÷ 6 = $3,000 per year
The formula is simple, but real-world depreciation can involve more complicated rules.
How Does Depreciation Work?
Depreciation generally starts with the asset’s cost or depreciable basis and spreads that amount over the appropriate period.
Several factors matter.
Original Cost
The starting point is usually the asset’s cost or another applicable basis.
Depending on the accounting or tax rules, the relevant basis can include more than the sticker price.
For example, tax rules may include costs such as sales tax, freight, installation, and testing when determining the basis of certain property. The IRS explains these rules in its current depreciation guidance.
Useful Life
Useful life is the period over which an asset is expected to provide economic benefits or remain useful under the relevant accounting rules.
A computer might have a shorter useful life than a building.
A manufacturing machine may last physically for 15 years but have a shorter useful life for accounting purposes if newer technology makes it uneconomical to operate.
Residual Value
Residual value, sometimes called salvage value, is the estimated amount an asset will be worth at the end of its useful life after considering expected disposal costs where applicable.
For example, a company might buy equipment for $40,000 and estimate that it will have a residual value of $4,000 after eight years.
The depreciable amount would be:
$40,000 − $4,000 = $36,000
Depreciation Method
The method determines how the depreciable amount is allocated.
A straight-line method spreads it evenly. Accelerated methods recognize more depreciation in earlier periods. A usage-based method links depreciation to production or activity.
What Causes Depreciation?
Several forces can reduce an asset’s value or usefulness.
Wear and Tear
Physical use is one of the most obvious causes.
A delivery truck accumulates mileage. A factory machine runs thousands of hours. Office furniture gets worn. Components eventually require replacement.
Age
Some assets become less valuable simply because they are older.
Age can affect vehicles, electronics, machinery, and other equipment even when the asset remains functional.
Obsolescence
Technology can make an asset outdated before it physically stops working.
A computer purchased five years ago might still turn on perfectly. Yet newer systems may perform the same tasks much faster.
The old computer has lost economic usefulness.
Reduced Demand
Market preferences can also affect value.
A particular vehicle model might become less popular. Specialized equipment might become harder to resell because fewer businesses use that technology.
Damage and Deterioration
Accidents, environmental exposure, corrosion, and poor maintenance can reduce an asset’s usefulness and market value.
Not every decline is handled through ordinary depreciation, though. Accounting standards may require separate treatment for impairment or other events.
Types of Depreciation
Different depreciation methods allocate an asset’s depreciable amount in different ways.
Straight-Line Depreciation
Straight-line depreciation allocates the same depreciation amount to each period over the asset’s useful life, assuming the relevant estimates remain unchanged.
The formula is:
Annual depreciation = (Cost − Residual value) ÷ Useful life
Example:
A $30,000 machine has a $5,000 residual value and a five-year useful life.
($30,000 − $5,000) ÷ 5 = $5,000 per year
This method works well when the asset provides relatively consistent benefits over its useful life.
Declining-Balance Depreciation
The declining-balance method is an accelerated approach.
Instead of applying the same dollar amount every year, the depreciation rate is applied to the asset’s declining carrying amount.
As a result, depreciation tends to be higher in earlier periods and lower in later periods.
This approach can make sense for assets that provide greater benefits early in their lives or lose usefulness more quickly at first.
Double-Declining-Balance Depreciation
The double-declining-balance method is a more aggressive accelerated method.
It applies twice the straight-line rate to the asset’s remaining book value, subject to rules that prevent depreciation from reducing the asset below its applicable residual value.
For example, an asset with a five-year useful life has a straight-line rate of 20%.
The double-declining rate would begin at:
20% × 2 = 40%
The actual calculation must then account for the declining book value and applicable conventions.
Units of Production Method
The units of production method bases depreciation on actual usage or output rather than simply passing time.
This can be useful for machinery where production volume provides a better measure of consumption.
For example, suppose a machine has:
- Cost: $100,000
- Residual value: $10,000
- Expected production: 90,000 units
The depreciable amount is $90,000.
Depreciation per unit would be:
$90,000 ÷ 90,000 = $1 per unit
If the machine produces 12,000 units during a particular period, depreciation would be $12,000 under this simplified example.
Depreciation Examples in Real Life
The word becomes much easier to understand when you see it outside a textbook.
Car Depreciation
Cars commonly lose market value as they age and accumulate mileage.
Several factors influence the amount of depreciation:
- Age
- Mileage
- Vehicle condition
- Accident history
- Brand and model
- Fuel type
- Consumer demand
- Maintenance history
- Local market conditions
- New-model releases
A $35,000 vehicle isn’t automatically worth $28,000 after one year. Real market values vary considerably.
That’s an important distinction: market depreciation isn’t calculated using the same formula as accounting depreciation.
Computer Depreciation
Computers can lose economic value quickly because technology changes rapidly.
A computer might still function perfectly after four years. Yet newer processors, memory standards, storage technology, security requirements, or software may make the older system less useful.
This is a classic example of technological obsolescence.
Machine Depreciation
A manufacturing business may buy a $200,000 machine and expect to use it for 10 years.
The business can allocate the machine’s depreciable cost over its useful life according to the applicable accounting method.
The machine’s actual resale price, however, may not match its accounting book value.
Building Depreciation
Buildings can also be depreciable assets under applicable accounting or tax rules.
Land is different. Land generally isn’t depreciated under standard accounting treatment because it normally doesn’t have a finite useful life in the same way a building does.
The IRS similarly states that most tangible property can be depreciated for tax purposes but specifically excludes land.
Depreciation vs. Appreciation
Depreciation and appreciation describe opposite directions of value change in ordinary usage.
| Term | Meaning | Example |
| Depreciation | A decline in value | A car becomes less valuable |
| Appreciation | An increase in value | A property becomes more valuable |
Suppose someone buys a house for $300,000 and later could sell it for $350,000.
The $50,000 increase represents appreciation in market value.
But that doesn’t mean every accounting treatment related to the property changes in the same way. Market value and accounting carrying amounts follow different concepts.
That’s why it’s dangerous to assume that depreciation is simply the accounting opposite of appreciation.
Depreciation vs. Amortization
Depreciation and amortization both involve allocating costs over time, but they generally apply to different types of assets.
| Term | Common application | Example |
| Depreciation | Tangible long-term assets | Machinery, vehicles, equipment |
| Amortization | Qualifying intangible assets | Certain patents, copyrights, or software |
| Depletion | Natural resources | Oil, gas, minerals, timber |
The terminology can vary depending on the accounting or tax framework.
The key distinction is the nature of the asset.
A factory machine is generally associated with depreciation. A qualifying patent is generally associated with amortization.
Depreciation vs. Depletion
Depletion applies primarily to natural resources.
Think about an oil field. The resource itself gets extracted and consumed. The accounting concept therefore focuses on the reduction of the resource base.
Examples include:
- Oil
- Natural gas
- Coal
- Minerals
- Timber
Depreciation generally concerns physical assets such as machinery and buildings, while depletion concerns the exhaustion of natural resources.
Depreciation Meaning in Different Contexts
The same word can answer different questions depending on where you encounter it.
| Context | Depreciation meaning |
| English | A decrease or loss in value |
| Accounting | Systematic allocation of an asset’s depreciable cost over its useful life |
| Economics | Decline in the value or productive usefulness of capital |
| Finance | An expense that affects reported earnings and asset carrying values |
| Mathematics | A decrease in a quantity according to a specified formula or rate |
| Taxation | Recovery of the cost or basis of qualifying property through permitted deductions |
This is why a search for depreciation meaning in English can produce a simpler definition while a search for depreciation meaning in accounting requires a much more technical explanation.
Depreciation Synonyms
There isn’t one perfect synonym for depreciation in every situation.
Depending on context, related expressions include:
- Loss of value
- Decline in value
- Reduction in value
- Decrease in worth
- Diminution in value
- Wear and tear
- Value decline
However, these aren’t always interchangeable.
For example, wear and tear can explain why an asset depreciates, but it isn’t a complete accounting synonym for depreciation.
Likewise, amortization is related to depreciation but usually refers to a different class of assets.
Is Depreciation an Expense?
Yes. Depreciation expense is an expense recognized in financial reporting.
It reduces accounting profit for the period.
However, depreciation isn’t normally a new cash payment when the expense is recorded.
Imagine a company buys equipment for $60,000 in January. The company pays the purchase price when it acquires the equipment. If it records $12,000 of depreciation during the year, it doesn’t usually write another $12,000 check for depreciation.
The accounting entry recognizes part of the asset’s cost as an expense.
Under IAS 16, depreciation is usually recognized in profit or loss, although in some situations it can become part of the cost of another asset.
Is Depreciation a Non-Cash Expense?
Yes, depreciation is generally considered a non-cash expense.
The important word is generally.
The company may have paid cash when it bought the asset, but the later depreciation expense doesn’t itself represent another cash outflow.
This explains why depreciation appears differently across financial statements.
Income Statement
Depreciation reduces expenses and therefore lowers reported profit.
Balance Sheet
Accumulated depreciation reduces the carrying amount of the related asset.
Cash Flow Statement
Under the indirect method, depreciation is typically added back to net income when reconciling to cash flow from operating activities because it reduced accounting income without being a current-period cash outflow.
Does Depreciation Reduce Taxes?
It can.
Tax systems often allow businesses to recover the cost of qualifying property through depreciation deductions. However, tax depreciation does not necessarily follow the same method or useful life used for financial reporting.
In the United States, for example, the IRS generally requires most property subject to its standard depreciation rules to use the Modified Accelerated Cost Recovery System (MACRS).
Tax rules can also change.
For example, the IRS’s current 2026 guidance states that the maximum Section 179 deduction for tax years beginning in 2026 is $2.56 million, subject to the applicable phaseout rules.
That doesn’t mean every business can simply deduct $2.56 million. Eligibility, taxable income limitations, property requirements, and other rules apply.
The larger point is simple:
Book depreciation and tax depreciation are not necessarily the same thing.
What Is Accumulated Depreciation?
Accumulated depreciation is the total depreciation recorded for an asset since depreciation began.
Suppose a business buys equipment for $80,000 and records $8,000 of depreciation each year under a simplified straight-line calculation.
After three years:
Accumulated depreciation = $8,000 × 3 = $24,000
The carrying amount would be:
$80,000 − $24,000 = $56,000
The $24,000 isn’t another expense on top of the three annual $8,000 charges. It is the cumulative amount of depreciation already recognized.
A Simple Three-Year Case Study
Consider this fictional business example:
Riverbend Printing buys a commercial printer for $80,000.
The company estimates:
- Useful life: 8 years
- Residual value: $8,000
- Depreciable amount: $72,000
Annual straight-line depreciation:
$72,000 ÷ 8 = $9,000
After four years:
Accumulated depreciation = $9,000 × 4 = $36,000
Carrying amount:
$80,000 − $36,000 = $44,000
Now suppose the printer could actually be sold for $48,000.
The accounting carrying amount is $44,000, while the estimated market selling price is $48,000.
That’s perfectly possible.
Book value and market value don’t have to match.
What Assets Can Be Depreciated?
The exact rules depend on the accounting and tax framework, but common depreciable assets include:
- Machinery
- Vehicles
- Computers
- Office equipment
- Furniture
- Buildings
- Manufacturing equipment
- Tools
- Production systems
For U.S. federal tax purposes, the IRS says depreciable property generally must be owned, used in a business or income-producing activity, have a determinable useful life, and be expected to last more than one year.
What Usually Isn’t Depreciated?
Land is the most familiar example.
Land normally doesn’t have a finite useful life in the same sense as machinery or a building. Therefore, it is generally not depreciated under standard accounting treatment.
Other assets may also fall outside depreciation depending on the applicable accounting or tax rules.
Don’t assume that every item a business owns qualifies for depreciation.
When Does Depreciation Begin?
The timing depends on the relevant accounting or tax rules.
For U.S. federal tax purposes, the IRS generally says depreciation begins when qualifying property is placed in service, meaning it is ready and available for its intended use.
That’s an important detail.
A company might purchase a machine in December but spend several weeks installing and testing it. The tax “placed in service” date may differ from the purchase date because the machine must be ready and available for the relevant use.
Accounting standards have their own requirements for when depreciation begins.
Why Is Depreciation Important?
Depreciation matters because long-term assets often provide benefits for several years.
Imagine a delivery company buying a truck for $50,000. The truck may help generate revenue for five years.
Charging the entire $50,000 against one year’s profit would make that year’s results look very different from the following years, even though the truck continues to help the business operate.
Depreciation provides a systematic way to recognize the asset’s cost over the periods that benefit from its use.
It also helps financial statement users understand that assets don’t remain economically useful forever.
Key reasons depreciation matters
- It recognizes the cost of long-term assets over time.
- It reduces accounting profit through depreciation expense.
- It reduces an asset’s carrying amount through accumulated depreciation.
- It helps businesses track the remaining book value of assets.
- It can affect taxable income under applicable tax rules.
- It plays an important role in cash-flow analysis.
- It reflects the consumption or allocation of an asset’s economic benefits.
Common Depreciation Mistakes
Depreciation sounds simple until several related concepts get mixed together.
Mistake: Assuming Depreciation Equals Market Loss
An asset’s market price can change rapidly because of supply, demand, interest rates, technology, or other factors.
Accounting depreciation follows a defined method rather than simply tracking every market-price movement.
Mistake: Treating Depreciation as a Cash Payment
Depreciation expense itself doesn’t normally involve a current cash payment.
The cash outflow generally happened when the business acquired the asset.
Mistake: Assuming Every Asset Depreciates
Land is the obvious counterexample under standard accounting treatment.
Some assets also require different accounting treatment altogether.
Mistake: Assuming Book Value Equals Selling Price
An asset with a $20,000 carrying amount might sell for $15,000 or $25,000.
Book value is an accounting measurement. Market value is determined by what buyers and sellers are willing to transact at under the relevant circumstances.
Mistake: Assuming Tax and Accounting Depreciation Are Identical
They often aren’t.
Tax authorities can prescribe specific recovery periods, methods, conventions, deductions, and limitations. The IRS, for example, uses MACRS for most U.S. federal tax depreciation of qualifying property.
Frequently Asked Questions About Depreciation
What Is the Simple Meaning of Depreciation?
Depreciation means a decrease in value over time. In accounting, it specifically refers to systematically allocating the depreciable cost of a qualifying tangible asset over its useful life.
What Is an Example of Depreciation?
A car purchased for $30,000 might later be worth $20,000 because of age, mileage, condition, and market demand. That $10,000 decline is an example of depreciation in the everyday sense.
For accounting, a business might instead allocate the car’s depreciable cost over its useful life using an applicable depreciation method.
What Is Depreciation in Accounting?
In accounting, depreciation is the systematic allocation of an asset’s depreciable amount over its useful life.
The calculation generally considers the asset’s cost, residual value, useful life, and depreciation method.
What Is the Formula for Depreciation?
For straight-line depreciation:
Annual depreciation = (Cost − Residual value) ÷ Useful life
For example:
($50,000 − $5,000) ÷ 5 = $9,000 per year
This is a simplified calculation. Actual accounting and tax rules can produce different results.
Is Depreciation an Expense?
Yes. Depreciation expense reduces accounting profit for the relevant period.
However, it is generally a non-cash expense because recording depreciation doesn’t itself require a new cash payment.
Is Depreciation a Loss?
In everyday language, depreciation can describe a loss in value.
In accounting, however, depreciation expense is better understood as an allocation of an asset’s depreciable cost rather than a direct measurement of the amount the asset has lost in market value.
What Is the Opposite of Depreciation?
In ordinary discussions about asset value, appreciation is the opposite direction. Appreciation means an increase in value.
However, appreciation isn’t simply the mirror image of accounting depreciation because market-value changes and accounting measurements follow different rules.
Is Depreciation an Asset or a Liability?
Depreciation expense is an expense, not an asset or liability.
Accumulated depreciation is a contra-asset account. It offsets the carrying amount of the related asset.
Is Depreciation a Non-Cash Expense?
Yes. Depreciation is generally a non-cash expense.
The business doesn’t normally pay cash each time it records depreciation. Instead, the business recognizes part of the cost of an asset over time.
Can Depreciation Be Negative?
Ordinary depreciation represents a reduction or allocation of value, so a negative depreciation amount isn’t the normal result.
If an asset’s value increases, that situation may involve appreciation, revaluation, or another accounting treatment rather than “negative depreciation.”
Can Land Be Depreciated?
Land is generally not depreciated under standard accounting treatment because it normally has an indefinite useful life.
Buildings located on land are different and can generally have finite useful lives.
For U.S. tax purposes, the IRS specifically identifies land as property that cannot be depreciated.
Key Takeaway: What Does Depreciation Mean?
The context determines exactly what the word means.
- In English: depreciation means a decrease or loss in value.
- In accounting: it allocates the cost of a tangible long-term asset over its useful life.
- In economics: it describes the aging and loss of value or usefulness of capital.
- In finance: it affects reported earnings, asset values, and cash-flow analysis.
- In mathematics: it describes a decrease according to a formula or rate.
- In taxation: it can allow the cost of qualifying property to be recovered through permitted deductions.
The most important distinction is between accounting depreciation and actual market-value decline. A company’s depreciation expense doesn’t necessarily tell you exactly how much an asset could sell for today.
Once that distinction is clear, the rest of the concept becomes much easier to understand.
