What is the financial impact of depreciation on a company's assets?

The financial impact of depreciation on a company's assets primarily results in a reduction of asset value. Depreciation is an accounting method used to allocate the cost of a tangible asset over its useful life. As assets age and are used in operations, they lose value due to wear and tear, obsolescence, or other factors.

Recognizing depreciation in financial statements leads to a decrease in the reported value of assets on the balance sheet. This reflects a more accurate representation of the company’s financial position, as it shows the diminishing worth of its assets over time. By recording depreciation, companies acknowledge the fact that their assets are not worth their original purchase price as they experience usage and aging.

Moreover, depreciation also has an effect on net income as it is recorded as an expense on the income statement. While it does not directly affect cash flow (since it is a non-cash expense), it is crucial for tax purposes since higher depreciation expenses can lower taxable income.