Depreciation is how businesses spread the cost of a long-term asset over the years it is expected to be used. Instead of recording the full cost in the year of purchase, the expense is allocated over the asset's useful life.
For example, if a company buys a machine for $100,000 with a 10-year useful life and no salvage value, it can depreciate $10,000 per year using the straight-line method.
Depreciation is a non-cash expense — no money actually leaves the company. But it reduces taxable income, which lowers the tax bill. Common methods include straight-line, declining balance, and units of production.