Final answer:
The allocation of the cost of a tangible asset over its service life is referred to as depreciation. Depreciation is a method used to distribute the cost of an asset, such as a machine or a building, over its useful life. It recognizes that assets lose value over time due to wear and tear, obsolescence, or other factors.
Step-by-step explanation:
The allocation of the cost of a tangible asset over its service life is referred to as depreciation.
Depreciation is a method used to distribute the cost of an asset, such as a machine or a building, over its useful life. It recognizes that assets lose value over time due to wear and tear, obsolescence, or other factors. By allocating the cost of the asset over its service life, businesses can accurately reflect the decrease in value of the asset on their financial statements.
For example, if a company purchases a machine for $10,000 and expects it to have a useful life of 5 years, they may allocate $2,000 of depreciation expense each year. This means that $2,000 is deducted from the company's income each year to account for the decrease in the machine's value.