What does depreciation represent in terms of equipment?

Depreciation represents the decline in market value of equipment over time due to various factors such as wear and tear, obsolescence, or changes in market demand. As equipment is used, its value typically decreases; this decrease is accounted for in financial records through depreciation. This process reflects the loss of economic value, allowing businesses to allocate a portion of the cost of the asset as an expense in each accounting period, which is important for accurately assessing profitability and financial health.

In this context, depreciation helps in understanding the true value of equipment on a business's balance sheet and ensures that financial statements provide a realistic view of the assets. It is a fundamental concept in accounting, impacting both tax liabilities and investment decisions.