What does depreciation refer to in an economic context?

Depreciation in an economic context refers to the reduction in the value of capital goods over time due to factors such as wear and tear, decay, and obsolescence. Capital goods, such as machinery, vehicles, and buildings, lose their value as they are used in production processes or simply as time passes. This decrease in value is a normal part of asset management and financial accounting, helping businesses account for the diminishing worth of their investments.

Understanding depreciation is crucial for financial reporting, as it affects profit calculations, taxation, and asset management strategies. By recognizing this reduction in value, businesses can properly reflect their financial health and make informed decisions regarding future investments.