What is depreciation in a business context?

Depreciation in a business context refers to the loss in value of an asset over time. This concept is essential for understanding how the value of fixed assets, such as machinery, vehicles, or buildings, diminishes as they are used in operations or simply as time passes due to wear and tear, obsolescence, or market factors.

When businesses recognize depreciation, they can allocate the cost of an asset over its useful life rather than expensing the entire purchase cost in the year it was acquired. This practice not only reflects a more accurate picture of financial performance but also helps in tax calculations as depreciation can often be deducted as a business expense. Understanding depreciation is fundamental for financial reporting and decision-making related to asset management and capital budgeting.

The other options do not accurately capture the definition of depreciation. An increase in asset value suggests appreciation rather than depreciation. A method for calculating profits is unrelated to the concept of reducing asset value, and assets sold for profit describes a transaction rather than a decrease in value over time.