What is depreciation in the context of financial accounting?

Depreciation is defined as the allocation of the cost of a tangible asset over its useful life. This process reflects how the value of an asset decreases over time due to wear and tear, usage, or obsolescence. By spreading the cost of the asset over its expected useful life, a company can match the asset's cost with the revenues it helps generate, adhering to the matching principle in accounting.

This approach ensures that the financial statements accurately represent the asset's consumption over time, allowing for more informed business decisions and better financial analysis. It also helps companies manage their earnings and provides a more realistic view of their profitability.

The other choices highlight concepts that do not align with the definition of depreciation. For example, the increase in asset value over time is more related to appreciation rather than depreciation. The selling price of an asset after its useful life refers to residual value, and the expense associated with borrowing funds pertains to interest expense, not depreciation. Thus, focusing on the allocation of tangible asset costs over their useful lives accurately captures the essence of depreciation in financial accounting.