In tax terms, what does Depreciation represent?

Depreciation represents the deduction for asset wear and tear. This concept recognizes that physical assets, such as machinery, vehicles, or buildings, can lose value over time due to usage, age, or obsolescence. The tax code allows businesses to deduct this decrease in value from their taxable income, thereby reducing their overall tax liability.

By claiming depreciation, business owners acknowledge that their assets are not static; instead, they diminish in value as they are used in business operations. This deduction helps to align the expense recognition with the revenues generated from the use of those assets, adhering to the matching principle in accounting.

The other options refer to different aspects of business and finance but do not accurately capture the essence of depreciation as a tax deduction related to asset wear and tear.