Depreciation is an accounting practice where the cost of a tangible asset, such as machinery, vehicles, or buildings, is allocated over the period of its useful economic life. This is done because these assets, though providing utility to the business for many years, lose value over time due to factors like wear and tear, age, or obsolescence. Depreciation helps in matching the expense related to the asset with the revenue it helps to generate during a given period, adhering to the accounting principle of matching costs with revenues.

For example, if a company purchases a delivery truck for $50,000 and estimates its useful life to be 10 years, with no salvage value at the end, it would record a depreciation expense of $5,000 per year using the straight-line depreciation method ($50,000/10 years). This expense appears on the income statement and reduces the company's taxable income, offering potential tax benefits, while the remaining unallocated cost is shown on the balance sheet.

Depreciation methods vary, with the straight-line method being the most common. Others include the declining balance and units of production methods, which can be selected based on the nature of the asset and its usage pattern.