What is the purpose of depreciation in accounting?

The purpose of depreciation in accounting is fundamentally about the systematic allocation of the cost of a tangible fixed asset over its useful life. This concept recognizes that fixed assets, such as machinery, vehicles, or buildings, provide benefits over multiple accounting periods. Depreciation reflects the consumption of the asset's economic benefits as it helps businesses match the asset's expense with the revenue it generates over time.

By spreading the cost of the asset over its useful life, companies can achieve a more accurate representation of their financial performance in each period, contributing to a clearer understanding of profit margins and overall financial health. This also aligns with the accrual basis of accounting, which aims to match expenses with revenues in the periods they help to generate.

The other options do not capture the primary purpose of depreciation. Increasing the value of fixed assets is not the objective of depreciation, as it typically results in a decrease in the asset's book value. While depreciation can provide tax benefits, as companies can deduct the depreciation expense from taxable income, this is an indirect effect rather than the main goal of depreciation itself. Similarly, calculating gain on asset disposal involves assessing the sale or exchange of an asset after depreciation has been accounted for but is not the fundamental purpose of depreciation itself.