Question

what is depreciation? a. cost of a fixed asset b. cost of a fixed asset’s repair c. the residual value of a fixed asset d. portion of a fixed asset’s cost consumed during the current accounting period 1. a is correct 2. b is correct 3. c is correct 4. d is correc

Answer 1

What is Depreciation?

In accounting terms, depreciation is defined as the reduction of recorded cost of a fixed asset in a systematic manner until the value of the asset becomes zero or negligible.

An example of fixed assets are buildings, furniture, office equipment, machinery etc.. A land is the only exception which cannot be depreciated as the value of land appreciates with time.

Depreciation allows a portion of the cost of a fixed asset to the revenue generated by the fixed asset. This is mandatory under the matching principle as revenues are recorded with their associated expenses in the accounting period when the asset is in use. This helps in getting a complete picture of the revenue generation transaction.