Depreciation is an accounting process in which the cost of a durable asset (such as machinery, buildings, vehicles, or equipment) is spread over its useful life. This means that the investment costs of assets are not recorded as expenses all at once but are instead gradually depreciated over several years.
Depreciation ensures that the costs of an investment are evenly distributed over the period during which the asset is used. This prevents a large investment from immediately appearing as an expense on the balance sheet, which could negatively impact the financial results of an organization.
Depreciation, therefore, allows for a more accurate representation of the value of assets in the accounting records. As a machine ages and wears out, its value decreases. In the bookkeeping, this is reflected by a decrease in the book value through depreciation, providing a realistic representation of the value of assets on the balance sheet.
Depreciation also enables organizations to better plan for the replacement costs of assets. As a machine or other asset approaches the end of its useful life, the organization can anticipate its replacement by closely monitoring depreciation in the accounting records.
In short, depreciation is essential for sound financial management and planning. It helps manage assets effectively and spread their costs over their useful life.
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