What is depreciation?

What is depreciation?

• A. The systematic allocation of the depreciable amount of an asset over its useful life.
• B. The write-down of an asset to zero value immediately.
• C. The recognition of revenue from asset use.
• D. The decline in market value of an asset.

Answer: (A)

Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. The depreciable amount is the asset’s cost minus any residual value, and the idea is to match the cost of using the asset with the periods that benefit from its use. It’s a non-cash expense recognized in the income statement and it gradually reduces the asset’s carrying amount on the balance sheet. It isn’t a write-down to zero value (that would be impairment or disposal), it isn’t revenue from using the asset, and it isn’t a decline in market value (that would reflect impairment or fair value changes). Different depreciation methods can be used, but the core concept is spreading the cost over the asset’s useful life.

Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. The depreciable amount is the asset’s cost minus any residual value, and the idea is to match the cost of using the asset with the periods that benefit from its use. It’s a non-cash expense recognized in the income statement and it gradually reduces the asset’s carrying amount on the balance sheet. It isn’t a write-down to zero value (that would be impairment or disposal), it isn’t revenue from using the asset, and it isn’t a decline in market value (that would reflect impairment or fair value changes). Different depreciation methods can be used, but the core concept is spreading the cost over the asset’s useful life.