What does the term 'depreciation' refer to?

The term 'depreciation' refers specifically to the allocation of a tangible asset's cost over its useful life. This accounting process allows businesses to spread the cost of a physical asset, such as machinery, buildings, or vehicles, across its useful lifespan, reflecting the asset's consumption and the wear and tear that occurs over time.

By recognizing depreciation, a company aligns the asset's cost with the revenues it generates, adhering to the matching principle in accounting. This treatment not only helps provide a more accurate depiction of a company's financial position but also aids in financial planning and tax reporting, as depreciation can be deducted as an expense.

The other options do not accurately capture the essence of depreciation. For instance, the concept of value increase or market value assessment does not apply, as depreciation specifically deals with cost allocation rather than value appreciation or market evaluation.