What does depreciation refer to in accounting?

Depreciation in accounting refers to the process of allocating the cost of a fixed asset over its useful life. It systematically reduces the book value of the asset to reflect its decreased value as it ages and is used in business operations. This reduction accounts for wear and tear, obsolescence, and the decline in value due to usage over time.

Recognizing depreciation serves several purposes: it provides a more accurate representation of an asset's value on financial statements, helps in calculating net income by matching expenses with revenue, and can provide tax benefits by reducing taxable income.

In contrast, increasing the value of an asset over time doesn't align with the concept of depreciation, as depreciation specifically involves the reduction of value. Accounting for cash flow discrepancies focuses on cash management rather than asset valuation. Lastly, recording unexpected gains from asset sales does not relate to depreciation, as this process concerns the appreciation or potential gains realized from the sale of an asset rather than the systematic reduction of an asset’s value through depreciation.