Depreciation Quiz

Depreciation in Accountancy

• Depreciation refers to the allocation of the cost of a tangible asset over its useful life, representing the decrease in value of the asset due to wear and tear, obsolescence, or other factors.

Impact on Balance Sheet

• Depreciation reduces the carrying value of a tangible asset on the balance sheet, reflecting the asset's decreasing value over time.
• Accumulated depreciation, the total depreciation expense incurred to date, is reported on the balance sheet as a contra-asset account.

Purpose of Depreciation

• Businesses depreciate long-term assets to accurately reflect the asset's decreasing value and to match the cost of the asset with the revenue generated by the asset over its useful life.

Impact on Income Statement

• Depreciation expense is reported on the income statement, reducing net income and reflecting the cost of using the asset during the period.
• Depreciation is a non-cash expense, as it does not involve an actual outflow of cash.

Allocation of Asset Cost

• The cost of a tangible asset is allocated through depreciation by dividing the asset's cost by its estimated useful life, or by using a depreciation method such as the straight-line method or the declining balance method.
• Depreciation allocates the asset's cost to the periods in which the asset is used, rather than charging the entire cost to the period in which the asset is purchased.