Which of the following best defines depreciation?

Depreciation is best defined as a noncash charge that reflects the wear and tear on fixed assets over time. This definition captures the essence of depreciation, highlighting that it is an accounting method used to allocate the cost of tangible assets over their useful lives. As fixed assets are utilized in operations, they gradually lose value due to physical wear, obsolescence, or market conditions. This reduction in value is recorded as a noncash charge in the financial statements, impacting the overall profitability of the entity without affecting cash flow.

This understanding is fundamental in financial management, as it helps in accurately representing the value of assets on the balance sheet and ensuring that expenses are matched with revenues in the income statement. The recognition of depreciation allows organizations to provide a more realistic view of their financial health, enabling better decision-making regarding asset management and capital investments.