The systematic allocation of the depreciable amount of an asset over its useful life.

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Depreciation is the allocation of the cost (or value) of a fixed asset against profits over its useful life. Depreciation can be calculated using different methods, such as straight-line or reducing balance, and reflects the wear and tear or obsolescence of an asset.

Example: A company buys a £10,000 machine expected to last five years. It depreciates the machine at £2,000 per year, spreading the cost evenly over the asset’s useful life. This straight-line depreciation method ensures the company gradually allocates the cost of the machine over its useful life, matching the expense to the periods benefiting from its use.