Depreciation is defined as which of the following?

Depreciation is defined as which of the following?

• A. An increase in asset value over time due to investment.
• B. A reduction in the value of an asset with the passage of time, due in particular to wear and tear.
• C. A method to record cash inflows.
• D. Impairment only after a sale.

Answer: (B)

Depreciation is the systematic allocation of the cost of a tangible asset over its useful life, reflecting how the asset loses value through use, wear and tear, and obsolescence. It’s a non-cash expense that reduces the asset’s book value over time and helps match the cost of the asset with the revenues it helps generate. It isn’t about cash inflows, nor does it increase asset value. Impairment is a separate concept that can reduce value more abruptly if the asset’s recoverable amount falls, possibly before a sale.

Depreciation is the systematic allocation of the cost of a tangible asset over its useful life, reflecting how the asset loses value through use, wear and tear, and obsolescence. It’s a non-cash expense that reduces the asset’s book value over time and helps match the cost of the asset with the revenues it helps generate. It isn’t about cash inflows, nor does it increase asset value. Impairment is a separate concept that can reduce value more abruptly if the asset’s recoverable amount falls, possibly before a sale.