Definition: Depreciation refers to an accounting method used to allocate the cost of a tangible or physical asset over its useful life or life expectancy. Depreciation represents how much of an asset's value has been used. Depreciating assets helps companies earn revenue from an asset while expensing a portion of its cost each year the asset is in use. Not accounting for depreciation can greatly affect a company's profits. Companies can also depreciate long-term assets for both tax and accounting purposes.

In Plain English: Depreciation spreads out the cost of a physical asset over the useful life of that asset.

Example: Say you bought equipment to make shoes that cost the business $100,000. And let’s say this equipment will last 10 years. Instead of recognizing that $100,000 as an expense at the moment of purchase you can depreciate it over the 10 years. So you would have an equipment expense of $10,000 each year for 10 years.

Assets such as machinery and equipment are expensive. Instead of realizing an asset's entire cost in year one, companies can use depreciation to spread out the cost and generate revenue from it. This is done through depreciation, which allows a company to write off an asset's value over a period of time, notably its useful life.