The gradual reduction of an asset’s value. It is an expense, but because it is non-cash, it is often effectively a tax write-off; that is, a person or company usually may reduce his/her/its taxable income by the amount of the depreciation on the asset. Because there are many different ways to account depreciation, it often bears only a rough resemblance to the asset’s useful life. This may further benefit the company as they may continue to use the asset tax-free after its value has technically depreciated to nothing.
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The periodic cost assigned for the reduction in usefulness and value of a long-term tangible asset. Because firms canuse several types of depreciation, the amount of depreciation recorded on corporate financial statements may or may notbe a good indication of an asset’s reduction in value. Depreciation not only affects the asset’s value as stated on thebalance sheet, it also affects the amount of reported earnings. See also Accelerated Cost Recovery System,accelerated depreciation, accumulated depreciation, recapture of depreciation, straight-line depreciation.