What is depreciation?

• A. The process of increasing asset value over time.
• B. An accounting assumption that fixed assets deteriorate, wear out and become obsolete, except land.
• C. A method of payment to suppliers.
• D. A tax credit for assets.

Answer: (B)

Depreciation is the accounting allocation of the cost of fixed assets over their estimated useful lives to reflect that they wear out, become obsolete, or lose value with use. Land isn’t depreciated because it generally doesn’t wear out. This means the asset’s cost is spread over the periods that benefit from its use, shown as depreciation expense on the income statement and as accumulated depreciation on the balance sheet, which reduces the asset’s book value over time. Different methods (like straight-line or accelerated) determine how much expense is recognized each year, but the idea remains the same: allocating cost over the asset’s life. This isn’t about increasing asset value, nor is it a payment to suppliers or a tax credit; it’s a non-cash expense that provides tax deduction benefits under applicable rules.