In the context of asset management, what does the term "depreciation" refer to?

Depreciation refers to the systematic reduction in the recorded cost of a tangible asset over its useful life. This decline in value occurs due to factors such as wear and tear, age, and obsolescence, which affect the asset's ability to generate economic benefits. By recognizing depreciation, businesses can match the expense of using an asset with the income it generates, providing a clearer picture of profitability over time. This concept is crucial in financial reporting because it impacts net income and the valuation of assets on balance sheets.

Understanding depreciation helps in accurate financial planning and investment analysis since it reflects the true economic value of an asset as it ages. This knowledge is essential for asset management decisions, ensuring that organizations maintain up-to-date records and forecasts regarding their investment in capital assets.