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CSEET · Fundamentals of Accounting · Depreciation and Amortization

Which of the following best describes depreciation as defined in the accounting standard on Property, Plant and Equipment?

Depreciation is the systematic allocation of the depreciable amount of an asset over its useful life. It spreads the cost of the asset across the periods that benefit from it, and is not a valuation exercise or a cash reserve for replacement.

  1. AThe systematic allocation of the depreciable amount of an asset over its useful lifeCorrect
  2. BThe fall in the market price of an asset during the year
  3. CThe amount set aside in cash to replace the asset at the end of its life
  4. DThe cost of repairs needed to keep the asset in working order

Explanation

AS 10 defines depreciation as the systematic allocation of the depreciable amount of an asset over its useful life. It is an allocation of cost, not a measure of market value changes. Setting aside cash is a funding decision and not depreciation, so the second and third options are wrong.

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