Question

Depreciation is used to

A. account for capital and ordinary expenditures.
B. record the purchase of an asset.
C. record expenses like an oil change for a delivery van.
D. set aside amounts to replace an asset at the end of its useful life.
E. none of the above.

Answer 1

Depreciation is an accounting method used to allocate the cost of a tangible asset over its useful life, reflecting its consumption or wear and tear.

Step-by-step explanation:

Depreciation is used to record the allocation of the cost of an asset over its useful life. It is essentially an accounting method of spreading the cost of a tangible or physical asset over its useful life. Depreciation is often confused with other expenditures, but it serves a specific purpose. It is not used to account for capital and ordinary expenditures, to record the purchase of an asset, for expenses like an oil change, or to directly set aside amounts to replace an asset. Instead, depreciation reflects how much of the asset's value has been used up during a fiscal period.

For example, when a company purchases a delivery van, this is a capital expenditure and the van is considered a durable good. Rather than expensing the full cost in the year of purchase, the company uses depreciation to allocate the van's cost over the period it will be in use. This ensures the company's financial statements reflect the van's declining value as it ages and is used in the business rather than immediately reflecting the full expense.