Depreciation is the process of allocating the cost of an asset to expense over its useful life in a rational and systematic manner. Companies do this by systematically assigning a portion of an asset’s cost as an expense each year (rather than expensing the full purchase price in the year of purchase). The assets that the company depreciates are reported on the balance sheet at cost less accumulated depreciation.
The accumulated depreciation account shows the total amount of depreciation that the company has expensed thus far in the asset’s life.