What is depreciation?

• A. Depreciation is the systematic allocation of the cost of a long-term asset over its useful life.
• B. Depreciation is the cash expense paid to acquire assets.
• C. Depreciation records an asset at market value.
• D. Depreciation increases asset value.

Answer: (A)

Depreciation is the systematic allocation of the cost of a long-term asset over its useful life. It represents spreading the asset’s cost across the periods that benefit from its use, not a cash outlay in the period it’s recorded. In accounting, you treat depreciation as an expense on the income statement, which reduces net income, while the asset’s book value on the balance sheet declines over time through accumulated depreciation. It does not reflect current market value, and it does not increase the asset’s value. The cash paid to acquire the asset happens at purchase; depreciation comes later as the cost is allocated over the asset’s useful life.