What does depreciation expense account for?

Depreciation expense accounts for the loss of value of fixed assets, such as plant and equipment, over time. This concept is rooted in the economic reality that assets like machinery, buildings, and vehicles lose value due to factors such as wear and tear, obsolescence, and age. As these assets are used in operations, their utility decreases, necessitating a systematic allocation of their cost over their useful life.

Recording depreciation expense allows businesses to reflect a more accurate financial position on their income statement by matching the asset's expense with the revenue it helps generate. This practice adheres to the matching principle in accounting, which aims to align expenses with the revenues they produce during a given period. By reporting depreciation, companies can better manage their budgets, tax liabilities, and financial analysis.

Other options do not accurately represent what depreciation expense entails. The increase in value of fixed assets is contrary to the purpose of depreciation since it focuses on valuation decline. The total cost of acquiring fixed assets pertains to initial purchase prices rather than the ongoing loss of value. Lastly, immediate cash impact is related to the cash outflow at the time of acquisition rather than an ongoing expense recognized over an asset's useful life.