Define depreciation.

Define depreciation.

• A. The systematic allocation of the depreciable amount of an asset over its estimated useful life.
• B. The immediate expense of the entire cost.
• C. The process of increasing an asset's carrying amount.
• D. The cost of replacing an asset with a similar one.

Answer: (A)

Depreciation is the systematic allocation of the depreciable amount of an asset over its estimated useful life. The depreciable amount is the cost of the asset less its residual (salvage) value, and it’s spread over the periods that benefit from the asset’s use. This matches the expense to the period when the asset helps generate revenue, rather than charging the whole cost in one period. In practice, depreciation is calculated using methods like straight-line, diminishing balance, or units of production, and each period you record a depreciation expense and reduce the asset’s carrying amount (through accumulated depreciation). For example, if a machine costs 50,000 with a residual value of 5,000 and a useful life of 10 years, straight-line depreciation would be (50,000 − 5,000) / 10 = 4,500 per year, gradually reducing the asset’s carrying value from 50,000 downward. It’s important to note what depreciation is not: it isn’t an immediate expense of the entire cost, it doesn’t increase the asset’s carrying amount, and it isn’t the cost of replacing the asset.

Depreciation is the systematic allocation of the depreciable amount of an asset over its estimated useful life. The depreciable amount is the cost of the asset less its residual (salvage) value, and it’s spread over the periods that benefit from the asset’s use. This matches the expense to the period when the asset helps generate revenue, rather than charging the whole cost in one period.

In practice, depreciation is calculated using methods like straight-line, diminishing balance, or units of production, and each period you record a depreciation expense and reduce the asset’s carrying amount (through accumulated depreciation). For example, if a machine costs 50,000 with a residual value of 5,000 and a useful life of 10 years, straight-line depreciation would be (50,000 − 5,000) / 10 = 4,500 per year, gradually reducing the asset’s carrying value from 50,000 downward.

It’s important to note what depreciation is not: it isn’t an immediate expense of the entire cost, it doesn’t increase the asset’s carrying amount, and it isn’t the cost of replacing the asset.