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CMA Foundation · Fundamentals of Financial and Cost Accounting · Depreciation (Straight Line and Diminishing Balance Methods)

Under the accounting meaning of depreciation, which statement is correct?

Depreciation is the systematic allocation of an asset's depreciable cost over its useful life. It matches the cost with the periods that benefit from the asset. It is a non-cash charge, not a cash replacement fund, not a market price fall and not a repair expense.

  1. AIt is a process of allocating the depreciable cost of a fixed asset over its useful lifeCorrect
  2. BIt is a fund of cash set aside to replace the asset
  3. CIt is the fall in the market price of the asset each year
  4. DIt is the cost of repairs incurred to keep the asset in working order

Explanation

Depreciation is a systematic allocation of the depreciable amount of an asset over its useful life, matching cost with the periods benefited. It is a non-cash charge and does not create a replacement fund. It is also not tied to market price changes, and repairs are a separate revenue expense.

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