Is depreciation the loss of value of fixed assets?

Yes, depreciation refers to the systematic allocation of the cost of a fixed asset over its estimated useful life. It represents the accounting recognition of the decrease in the value or usefulness of a fixed asset as it is used in the operations of a business.

Fixed assets, such as buildings, machinery, vehicles, and equipment, are expected to have a limited useful life. Over time, their value decreases due to factors such as wear and tear, obsolescence, or technological advancements. Depreciation is a way to allocate the cost of the asset over its expected useful life, matching the expense with the revenue it helps generate.

Depreciation is recorded as an expense on a company’s income statement, reducing the reported net income and, consequently, the value of the asset on the balance sheet. By recognizing depreciation, a company accurately reflects the decrease in the value of its fixed assets over time.

It’s important to note that depreciation is an accounting concept and does not necessarily reflect the actual market value or resale value of the asset. The purpose of depreciation is to systematically allocate the cost of the asset over its useful life, rather than to measure its current market value. The actual market value of an asset may differ from its book value or the accumulated depreciation recorded on the company’s financial statements.

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