Depreciation is an accounting method for systematically allocating the cost of a tangible asset over its useful life. There are many standard methods, which an entity can adopt.
- The systematic allocation spreads the cost over the service life of the tangible asset. Depreciation also matches the cost with the asset's annual revenue.
- In financial accounting, the yearly depreciation charges are expenses deducted from the Income Statement. These annual expenses are accumulated in a contra account called the Accumulated Depreciation Account so that the asset's cost remains in the records until its disposal.
Thus, the systematic allocation of the cost of an asset over its useful life is known as depreciation.
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