Spreading a long-lived asset's cost over the years it's used.
Depreciation spreads the cost of a long-lived asset — a vehicle, machine, or computer — over the years it helps earn revenue, instead of expensing the entire cost the day it's bought. It applies the matching principle to big purchases.
Each period, a depreciation entry moves a slice of the asset's cost into expense (no cash moves), while accumulated depreciation grows on the balance sheet, reducing the asset's book value. Book depreciation and tax depreciation follow different rules — tax law allows accelerated methods — which is normal, and one reason the tax return and the books can legitimately differ.
A $15,000 van expected to serve 5 years depreciates $3,000 a year (straight-line): debit Depreciation Expense, credit Accumulated Depreciation. After two years its book value is $9,000 — an allocation of cost, not an appraisal of resale value.
Fixed Assets · Journal Entry · Cost of Goods Sold (COGS) — or browse the full plain-English glossary.
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