What does depreciation apply to in accounting?

Depreciation in accounting refers to the systematic allocation of the cost of a tangible asset over its useful life. This concept is applicable to limited life assets, which are physical items that provide value over a period of time but will eventually wear out or become obsolete. Assets that typically undergo depreciation include machinery, vehicles, and buildings. The purpose of depreciation is to match the expense of using the asset with the revenues it generates, reflecting a more accurate financial position and performance over time.

When assets have a limited useful life, their value decreases as they are used in operations. This decrease in value is recorded as an expense on the income statement, allowing businesses to account for the wearing down of physical assets. Therefore, the application of depreciation is essential for representing the economic reality of asset utilization within a business, making it crucial for financial reporting and tax purposes.

Other options do not accurately represent the application of depreciation. Intangible assets and financial investments generally do not fit within the definition and scope of depreciation as they are treated differently in accounting standards.