What does "depreciation" refer to in accounting?

What does "depreciation" refer to in accounting?

• A. The total cost of inventory sold during the year
• B. The allocation of the cost of a tangible asset over its useful life
• C. The increase in value of an asset over time
• D. A method to reduce taxable income in the current year

Answer: (B)

Depreciation in accounting refers specifically to the allocation of the cost of a tangible asset over its useful life. This process recognizes that tangible assets, such as machinery, vehicles, and buildings, lose value over time due to wear and tear, aging, or obsolescence. By spreading the initial cost of the asset across its useful life, businesses can match the expense of using the asset with the revenues it generates, adhering to the matching principle of accounting. This systematic allocation helps in accurately reporting the asset's value on the balance sheet and reflects the diminishing value of the asset in the company's financial statements. This approach also assists companies in budgeting for future replacement or upgrades of assets when they reach the end of their useful life.

Depreciation in accounting refers specifically to the allocation of the cost of a tangible asset over its useful life. This process recognizes that tangible assets, such as machinery, vehicles, and buildings, lose value over time due to wear and tear, aging, or obsolescence. By spreading the initial cost of the asset across its useful life, businesses can match the expense of using the asset with the revenues it generates, adhering to the matching principle of accounting.

This systematic allocation helps in accurately reporting the asset's value on the balance sheet and reflects the diminishing value of the asset in the company's financial statements. This approach also assists companies in budgeting for future replacement or upgrades of assets when they reach the end of their useful life.