In governmental accounting, what is meant by "depreciation"?

The concept of depreciation in governmental accounting refers to the systematic allocation of the cost of a tangible asset over its useful life. This process reflects the reduction in value that occurs as the asset is used and ages. By applying depreciation, financial statements can more accurately represent the true cost of using the asset and the decline in its value over time.

This practice is essential for providing stakeholders with a realistic view of an entity's financial health. It ensures that the expenses related to asset usage are matched with the revenues generated by those assets, adhering to the accrual basis of accounting. In the context of governmental accounting, where transparency and accountability are paramount, understanding and recording depreciation allow for more informed decision-making regarding resource allocation and asset management.

Other concepts such as overspending the budget, increasing market values, or merely recording purchase costs do not accurately capture the essence of depreciation, which is focused specifically on the gradual reduction in value of existing tangible assets.