The purpose of depreciation is to what?

Depreciation is a method used in accounting to allocate the cost of a tangible asset over its useful life. The primary purpose of this process is to match the cost of the asset with the revenue it generates during each accounting period. By doing so, businesses can more accurately reflect their financial performance, as the expenses associated with an asset are recognized in the same periods that the asset contributes to revenue.

This matching principle is fundamental in accrual accounting, allowing businesses to present a clearer picture of profitability. For example, if a company owns a delivery truck that is used to generate revenue over several years, the cost of purchasing that truck is not recognized all at once. Instead, depreciation spreads the cost over the years the truck is in use, coinciding with the revenue it helps to generate.

Other options, while related to financial management, do not encapsulate the core purpose of depreciation. Reducing asset value is a byproduct of depreciation, and balancing the company’s budget or preparing for asset disposal are considerations that arise in the broader context of financial planning and reporting but are not the primary aim of the depreciation process itself.