What is the definition of depreciation?

The correct definition of depreciation is the allocation of the cost of a tangible asset over its useful life. This accounting concept helps businesses match the expense of using an asset with the revenue it generates over time. When a company purchases a tangible asset such as machinery or vehicles, it does not account for the entire cost in the year of purchase. Instead, it spreads the cost of that asset over the period it is expected to be used, reflecting the asset's declining value as it ages and is utilized in operations.

This systematic approach not only provides a more accurate representation of a company’s financial health by recognizing the expense associated with the asset over time but also aligns with the matching principle in accounting, which states that expenses should be recorded in the same period as the revenues they help to generate. Thus, recognizing depreciation allows businesses to prepare financial statements that more accurately reflect their operational performance and asset value.