What is the definition of Depreciation?

Depreciation is defined as a practice of allocating the cost of fixed assets over their useful lives. This allocation reflects the gradual reduction in value of an asset as it is used over time. Fixed assets, such as machinery, vehicles, and buildings, are not expensed in full at the time they are acquired. Instead, their cost is spread out across the years they are expected to be used for generating revenue. This systematic approach helps businesses match the cost of the assets with the revenue they generate, providing a more accurate representation of financial performance over time.

By doing so, depreciation also impacts financial statements, particularly the income statement and balance sheet. The expense recognized through depreciation reduces taxable income, thereby influencing cash flow. This accounting method ensures that the economic reality of asset utilization and value reduction is reflected in financial reporting.

Other options do not pertain directly to the definition of depreciation. For example, valuing inventory, assessing cash flow, and estimating future revenues do not align with the principle of allocating fixed asset costs systematically over time. These concepts may relate to accounting and finance but do not capture the specific definition and methodology of depreciation as it applies to fixed assets.