What is the purpose of running depreciation on fixed assets?

Running depreciation on fixed assets serves the purpose of systematically allocating the cost of an asset over its useful life, which directly reduces the book value of those assets on the balance sheet. This reduction reflects the diminishing value of the asset as it is used and helps to provide a more accurate representation of the company's financial position.

By recording depreciation, businesses recognize that fixed assets, such as machinery or vehicles, lose value over time due to wear and tear, obsolescence, or market conditions. This practice adheres to accounting principles, such as the matching principle, where expenses are recognized in the same period as the revenues they help generate, thereby providing a clearer financial picture.

As a result, the primary goal of depreciation is to ensure that the financial statements accurately portray the current state of the assets owned by the company, contributing to more informed decision-making by stakeholders. The choice that asserts this reduction in book value aligns with this fundamental principle in accounting practices involving fixed assets.