Define 'depreciation'.

Depreciation refers to the systematic allocation of the cost of a tangible asset over its useful life. This process recognizes that assets such as machinery, vehicles, and buildings lose value as they age and are used in business operations. By allocating the cost of these assets over the periods they benefit the company, businesses can better match costs with revenues generated during those periods.

This allocation helps in accurately reflecting the value of assets on financial statements. It ensures that expenses related to the use of an asset are recognized over time, aligning with the matching principle in accounting, which states that expenses should be matched with the revenues they help generate. This systematic approach to expense recognition provides a clearer picture of a company’s profitability and asset management efficiency.

Understanding depreciation is crucial for making informed decisions related to asset management, financial reporting, and tax implications, as it can affect a company's taxable income and cash flow management.