Final answer:
Depreciation is the method of allocating the cost of a major asset over its useful life for tax and accounting purposes. It involves spreading the cost of the asset over time instead of recognizing it all at once. This allows businesses to properly account for wear and tear or obsolescence of fixed assets.
Step-by-step explanation:
The method of allocating the cost of a major asset, such as a piece of capital equipment, over its useful life for tax and accounting purposes is best called Depreciation.
Depreciation is the systematic allocation of the cost of an asset over its useful life. It is a way of spreading the cost of the asset over time, rather than recognizing it all at once. This is done for tax and accounting purposes as it allows businesses to properly account for the wear and tear or obsolescence of their fixed assets.
For example, if a company purchases a piece of equipment for $10,000 and expects it to have a useful life of 5 years, they can allocate the cost of the equipment evenly over those 5 years by depreciating it by $2,000 per year. This helps match the expense of the equipment with the revenue it generates, providing a more accurate representation of the company's financial performance.