What does it mean to depreciate an asset?

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Depreciating an asset refers to the accounting process of allocating the cost of a tangible asset over its useful life. This method reflects the wear and tear on the asset, thus reducing its book value over time, which is captured by reducing the basis of the asset. By doing so, businesses can match the asset's cost against the revenues it generates, providing a clearer picture of the company's financial situation and profitability over time.

This process is essential for tax reporting as it allows businesses to deduct a portion of the asset's cost each year, rather than taking a single large deduction at the time of purchase. This gradual reduction in value is important for accurately reflecting the actual economic status of the asset and the company as a whole.

The other options refer to either increasing value or treating an asset as an immediate expense, which do not align with the standard accounting practices for depreciation. The idea of selling an asset at a loss also does not relate to depreciation, as depreciation itself is an accounting measure rather than an action of selling.

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