1. Depreciation

Depreciation is the systematic allocation of the cost of a tangible asset over its useful life. As assets like machinery, buildings, or vehicles are used, they wear out, become obsolete, or lose value. Depreciation recognizes this loss in value and reflects it as an expense in the income statement, thereby matching the cost of the asset with the revenue it helps generate over time.

2. Depreciation Accounting

Depreciation accounting involves methods for calculating and recording depreciation. Common methods include the straight-line method (equal charge each year) and the diminishing balance method (charge decreases each year). Proper depreciation accounting is crucial for accurately valuing assets on the balance sheet and determining the true profit or loss in the income statement.

3. Provisions and Reserves

Provisions are amounts set aside for known liabilities of uncertain timing or amount (e.g., provision for doubtful debts, provision for tax). Reserves are accumulations of profits set aside for specific future purposes or to strengthen the financial position (e.g., general reserve, capital reserve). Both are created out of profits to manage future uncertainties and strengthen the company's financial standing.