What is the role of depreciation in accounting?

The role of depreciation in accounting primarily revolves around the allocation of the cost of a long-term asset over its useful life. This practice reflects the consumption, wear and tear, or decline in value of the asset as it is used in the business. By spreading the cost over several accounting periods, depreciation allows companies to match the expense associated with an asset to the revenues it helps generate during those periods. This matching principle is key to accurate financial reporting and helps present a more realistic view of a company's financial performance.

Additionally, proper depreciation methods can assist in financial forecasting and budgeting, as they provide insights into when assets may need to be replaced or upgraded.