What purpose does depreciation expense serve in accounting?

The purpose of depreciation expense in accounting is to allocate the cost of an asset over its useful life. When a company acquires a long-term asset, it does not recognize the entire cost as an expense in the period of purchase, as this would not accurately reflect the economic value received over time. Instead, depreciation systematically reduces the asset's book value and spreads the cost across the years it is expected to generate revenue. This process matches the expense of using the asset with the income it helps to produce, adhering to the matching principle of accounting.

This allocation reflects a more accurate financial position and performance of the business over time, as it ensures that expenses are recognized in the same periods as the revenues they generate. It helps present a clearer picture of profitability in financial statements.

The other options do not accurately describe what depreciation expense does. For instance, depreciation does not increase asset value, nor does it relate to reflecting changes in inventory or reporting cash transactions. Rather, its primary function is to ensure that asset costs are appropriately matched against revenues, supporting more accurate financial reporting and decision-making.