What Is the Purpose of Depreciation?

What Is the Purpose of Depreciation?

Businesses use depreciation to determine the spread-out cost of an asset over its entire span of usefulness, as noted by Investopedia. For example, if an asset remains useful for 10 years, the company calculates depreciation during a 10-year period.

Each year, the asset uses some of its value. The value of the asset can then be compared to the amount of revenue or income it generates to benefit the business. Companies can deduct depreciation when they file corporate taxes, which helps offset the cost of acquiring their assets in the first place. In some cases, however, depreciation escalates based on the economy. Real estate prices fluctuate constantly and depreciation might happen more quickly than anticipated.