Explanation

Depreciation allocates fixed asset cost over useful life. Straight-line: (cost – residual value) / useful life = annual depreciation. Same amount each year.

Reducing balance: percentage applied to remaining book value. Higher in early years. Better matches assets that lose value quickly at first (vehicles, technology).

Purposes: matching expense to revenue in periods benefited, showing realistic asset values, providing funds for replacement. Not actual cash outflow.