What is the purpose of depreciation in accounting?

The purpose of depreciation in accounting is to allocate the cost of a tangible asset over its useful life. This process is essential because it matches the expense of the asset with the revenue it generates over time, providing a more accurate representation of a company's financial performance. When an asset is purchased, its entire cost cannot be deducted from income in the year of purchase; instead, depreciation spreads this cost over the asset's useful life, reflecting its consumption and wear and tear as it is used in operations.

Depreciation also helps ensure compliance with accounting principles, such as the matching principle, which states that expenses should be recorded in the same period as the revenues they help generate. This practice improves financial reporting by presenting a truer picture of profitability. Additionally, the depreciation expense reduces taxable income, which may affect a company's cash flow positively in the long term.

In contrast to the other choices, increasing taxable income does not align with the purpose of depreciation; assessing liquidity focuses on a company's ability to meet short-term obligations; and determining the resale value of an asset is more about market considerations than the methodical allocation of costs as depicted by depreciation.