What is depreciation primarily used for?

Depreciation is primarily used to recover the value of property over time. This accounting method allocates the cost of a tangible asset over its useful life, reflecting the decline in value as the asset is used. By systematically reducing the asset's book value, depreciation helps organizations match the expense of using the asset with the revenue it generates. This approach provides a more accurate picture of an organization's financial health over time, allowing for better financial planning and decision-making.

Understanding that depreciation is not intended to increase an asset's market value is crucial. In fact, as an asset depreciates, its market value typically declines, reflecting wear and tear or obsolescence. Additionally, depreciation has no relevance in evaluating employee performance or calculating sales revenue, as these activities focus on different aspects of a business's operation.