What is meant by depreciation?

Depreciation refers to the process by which an asset loses value over time, typically due to wear and tear, age, or obsolescence. This concept is crucial in financial literacy as it affects both personal and business finances. For instance, when you purchase a vehicle, it may lose value gradually as it ages and is used. Understanding depreciation helps individuals and businesses make informed decisions about investments, taxation, and asset management.

In accounting terms, depreciation is often reflected on financial statements to provide an accurate picture of an asset’s value and contribute to calculating profits and losses. It emphasizes the importance of recognizing that not all assets retain their initial purchase value and that this loss will affect overall financial health and budgeting strategies.