How is 'depreciation' defined?

Depreciation is defined as the systematic allocation of the cost of a tangible asset over its useful life. This definition captures the essence of how tangible assets, such as machinery or buildings, lose value over time due to wear and tear, obsolescence, or other factors. By spreading the cost of the asset over its expected useful life, businesses can align the expense of using that asset with the revenue it generates, adhering to the matching principle in accounting. This approach provides a clearer picture of a company's financial performance, reflecting the expense in the same period that the related benefits are received.

The other options provided do not accurately capture the meaning of depreciation. Determining an asset's selling price relates to its market value rather than its allocation of cost over time. The concept of an increase in value over time describes appreciation, not depreciation. Lastly, assessing a company's debt to equity ratio involves evaluating its financial leverage, which is unrelated to how tangible assets are accounted for in terms of depreciation.