Definition

Depreciation is an accounting principal that allows businesses to incrementally write off an asset's  value over the course of its useful life. Businesses can elect to write off an asset's value in one lump some or in smaller portions spread across many reporting periods until the deprecated amounts equal the total cost of the asset.

Depreciation Example

Let's say a company purchases a piece of equipment required to run the business for $100,000 and has a useful life of 10 years. The annual depreciation can be calculated by taking the $100,000 value and divide that by the 10 years of useful life to get an annual depreciation expense of $10,000.

Why it is important

Depreciation allows businesses to maximize their deductions and minimize tax burdens.