What does the term “depreciation” refer to?

Depreciation refers specifically to the systematic reduction in the recorded cost of a tangible fixed asset over its useful life. This decrease in value occurs as the asset is utilized, reflecting wear and tear, obsolescence, or other factors that contribute to its diminished worth over time. Businesses recognize depreciation as an expense on their financial statements, allowing them to account for the loss in value of their fixed assets, thus providing a more accurate view of their financial health. Through this process, depreciation serves not only as a method of allocating the asset's cost but also as a means to match expenses with revenues generated by the use of that asset.

In contrast, other options such as an increase in an asset’s value, analysis of asset return on investment, or total cost of an asset at acquisition do not align with the established definition of depreciation, as they focus on growth, assessment, or initial cost rather than the decrease in value attributed to usage over time.