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

Which statement best describes the nature of depreciation as an accounting charge?

Depreciation is the systematic allocation of an asset's depreciable amount, cost less residual value, over its useful life. It is a non-cash expense, not a fund for replacement, not a measure of market value decline, and it is charged whether or not the business makes a profit.

  1. AIt is a cash outflow set aside each year to buy a new asset
  2. BIt is the allocation of the depreciable amount of an asset over its useful lifeCorrect
  3. CIt is the fall in the market value of the asset each year
  4. DIt is a charge made only when the business earns a profit

Explanation

Depreciation is a systematic allocation of cost less residual value over the useful life. It is a non-cash charge, so it does not itself provide funds to replace the asset. It is charged irrespective of profit and is not a measure of market value changes.

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