Which of the following statements best describes depreciation?

Depreciation is fundamentally concerned with accounting for the wear and tear, usage, or obsolescence of an asset over time. This concept allows businesses to allocate the cost of tangible assets over their useful lives, providing a more accurate reflection of an asset's value on financial statements. As assets are utilized in operations, their value diminishes, and this decline is systematically recorded through depreciation.

Choosing the statement that identifies depreciation as accounting for the reduction in asset value over time accurately captures its essence and purpose in accounting practices. It emphasizes the importance of recognizing that fixed assets lose value as they age, enabling businesses to better assess their financial position and maintain accurate records. This distinction is vital for both internal management and external reporting, distinguishing depreciation from factors like market value or liquidity ratios.