What is the purpose of depreciation?

Depreciation serves the important purpose of allocating the cost of a tangible asset over its useful life, reflecting the wear and tear or usage of that asset as it contributes to generating revenue for the business. By systematically spreading the cost over the years the asset is expected to be in use, businesses can match the expense of the asset with the revenues it helps to produce. This matching principle is fundamental in accounting because it allows for a more accurate representation of a company's financial performance.

When businesses record depreciation, they decrease the book value of the asset on their balance sheet and recognize an expense on their income statement, which ultimately affects net income. This not only provides a clearer picture of profitability but also helps businesses make informed decisions regarding asset management and capital budgeting.

The other options reflect concepts that do not align with the primary purpose of depreciation. For example, while measuring cash flow is important, depreciation affects reported profits rather than actual cash flow since it is a non-cash expense. Increasing asset values contradicts the essence of depreciation, which is to reduce the book value of the asset over time. Lastly, determining profit margins involves broader calculations of revenues and expenses, whereas depreciation specifically pertains to the allocation of an asset's cost.