What does depreciation refer to in accounting terms?

Depreciation in accounting refers specifically to the reduction in value of an asset over time due to factors such as wear and tear, obsolescence, or age. This definition aligns with the concept of a lessening in value, which is accurately captured in the chosen answer.

In accounting practices, depreciation is essential for allocating the cost of tangible assets over their useful life, allowing businesses to accurately reflect their financial status. It impacts financial statements by reducing taxable income, thus affecting net income reported on the income statement.

The other options do not define depreciation correctly. For instance, an increase in asset value is opposite to the concept of depreciation, and the process for calculating interest payments relates to finance, not asset valuation. Capital gains tax pertains to the profit from the sale of an asset, which is not directly related to the concept of depreciation.