What is the primary purpose of depreciation?

The primary purpose of depreciation is to spread out the cost of an asset over its useful life. This allocation of cost reflects how the asset contributes to income generation over time. As an asset is used, it gradually loses value due to factors such as wear and tear, obsolescence, or age, and depreciation provides a systematic method to account for this loss in value.

By applying depreciation, businesses can more accurately match expenses with revenues, leading to a clearer representation of profitability in financial statements. This matching principle adheres to accounting standards, ensuring that the financial statements reflect the true performance of the company.

While depreciation can influence tax deductions and overall asset valuation, its primary aim remains the proper allocation of the acquisition cost over the time the asset is used, allowing for a more accurate financial picture.