If a firm acquires a big asset such as a factory, it will expect to use it for many years to help it to generate revenue.

The question then arises as to how to treat the initial cost, say £1m. Depreciation is the process whereby the cost of the asset is spread over the years the firm hopes to use the factory to generate sales. So, for example, if that period is 20 years, profits will take a charge each year of about £50,000 (£1m/20). That cost is known as a depreciation charge. It is thought to give a fairer view of how the asset is being used than simply writing off the whole cost against profits in the year that it is acquired.