Depreciation is an allowance or allocation to cover the reduction of an asset’s value over time. For example, items such as cars, computers and manufacturing equipment decline in value over an extended period of time as they are subjected to ongoing use. This usage is often referred to as wear and tear.
This term frequently applies to business use, but can be applied in any situation in which an asset loses value. For example, sometimes a home will drop in value due to issues such as neighborhood decline. This drop in value is depreciation. A decrease in the value of a currency is also called depreciation. For example, if the value of the dollar drops against most other currencies, it is said to be depreciated.
For tax purposes, depreciation is used as a deduction to reflect the diminishing value of assets. Depreciation decreases the overall worth of a business and is reflected as an operating expense or cost of doing business. There are many different systems used for depreciation and they can change with each tax year. For many items, their value is reduced to zero or near zero after several years, even if the item retains some resale value.