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Depreciation is an accounting method of allocating the cost of a tangible or physical asset over its useful life or life expectancy. It represents how much of an asset's value has been used up over time. Depreciation is used in accounting to try and match the expense of an asset to the income that the asset helps the company earn.
Depreciation is an important aspect of accounting because it is a non-cash expense that reduces a company's earnings on its income statement, hence reducing taxable income. While depreciation can seem like a theoretical concept, it's important to keep track of this as it impacts a company's financial and tax position. For tangible assets like machinery, equipment, and vehicles, depreciation is an essential part of determining an asset's net book value.
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