What is depreciation and give example?

Depreciation refers to the decrease in the value of an asset over time due to wear and tear, obsolescence, or other factors. It is a method used in accounting to allocate the cost of an asset over its useful life.

For example, let's consider a company that purchases a delivery truck for $50,000. The estimated useful life of the truck is 5 years, and the company expects to sell it for $10,000 at the end of its useful life. Using the straight-line depreciation method, the company would divide the cost of the truck ($50,000) by its useful life (5 years) to determine an annual depreciation expense of $10,000.

Year 1: Truck value = $50,000 - $10,000 = $40,000
Year 2: Truck value = $40,000 - $10,000 = $30,000
Year 3: Truck value = $30,000 - $10,000 = $20,000
Year 4: Truck value = $20,000 - $10,000 = $10,000
Year 5: Truck value = $10,000 - $10,000 = $0

By the end of the truck's useful life, its value has depreciated to zero, reflecting its reduced worth due to usage and aging.