Question

..... is the allocation of the cost of a long-lived, tangible asset over its useful life creating an expense on the income statement that is matched against the revenue generated by using the asset. (Enter only one word per blank.)

Answer 1

Depreciation is the process of allocating the cost of tangible assets over their useful lives to match costs with revenue. It is an essential concept in business accounting, impacting investment strategies and the balance sheet.

Step-by-step explanation:

The allocation of the cost of a long-lived, tangible asset over its useful life, creating an expense on the income statement that is matched against the revenue generated by using the asset, is called depreciation. This accounting practice allows businesses to spread out the cost of assets such as machinery, equipment, or buildings across their expected useful lifespan. This ensures that the cost is aligned with the income produced by the asset, thereby giving a more accurate financial picture of the company's performance over time.

Fixed costs, like rent or the cost of purchasing heavy machinery, don't vary with the level of production in the short run. These costs are contrasted with variable costs, which do fluctuate with production levels. For businesses that invest in long-term assets, understanding and managing depreciation is crucial to investment strategies and maintaining a balanced balance sheet. The total cost of ownership includes both the purchase price and the depreciation of assets over time.