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Depreciation is an accounting method, by which the dollar value of an asset (e.g. piece of equipment) is reduced, and applied to expense, as the asset is used and ages. When you buy an asset, the cost of it is debited to an asset account at the top of the balance sheet. This is true even if you pay cash for it. This is in contrast to applying the asset cost all at once to an expense account. The reason is that the asset is of value to the business. However, as the asset is used, and ages, it is correct accounting wise to decrease it’s value on the balance sheet, and apply the change in value during say, a month, to a cost account on the income statement.