What is the definition of depreciation?

• A. Allocating the cost of a fixed asset over its useful life
• B. Recording cash outflow at purchase
• C. Adjusting asset to market value
• D. Recognizing accrued expenses

Answer: (A)

Depreciation is the process of allocating the cost of a fixed asset over its useful life. This spreads the expense across the periods that benefit from the asset, aligning with the idea that the asset provides value over multiple years rather than all at once. It’s a non-cash expense—the cash outlay occurs when the asset is purchased, while depreciation reduces reported income over time and increases accumulated depreciation on the balance sheet. The other statements describe different ideas: recording a cash outflow at purchase is about cash transactions, adjusting an asset to market value refers to impairment or revaluation, and recognizing accrued expenses deals with expenses incurred but not yet paid.