Question

Allocating the cost of long-lived tangible assets used in the operations of a business is referred to as:

a) Depreciation
b) Using up the asset
c) A deferral
d) An accrual

Answer 1

Depreciation is the accounting method of spreading the cost of a tangible asset over its useful life, which allows for matching the expense of the asset with the revenue it generates.

Step-by-step explanation:

Depreciation is an accounting method of allocating the cost of tangible assets over their useful lives. It represents how much of an asset's value has been used up during a certain accounting period. Depreciation is a fundamental concept in accounting, allowing businesses to spread the cost of assets so as to match each period's revenue with the expenses (asset cost) related to generating that revenue.

For example, if a company purchases a piece of machinery for $100,000 and expects it to last 10 years, the company would depreciate the machine at the rate of $10,000 per year, meaning that each year’s income statement will reflect a $10,000 expense for the use of the machine. This allows the company to link the machinery's cost with the income it helps to generate, adhering to the matching principle in accounting.