Which of the following best describes depreciation in financial accounting?

• A. A systematic allocation of the cost of a tangible long-lived asset to expense over its useful life
• B. An annual adjustment that increases the market value of a long-lived asset to fair value and records a gain
• C. A one-time write-off of an asset’s entire cost in the year the asset is purchased
• D. A process of setting aside cash in a separate account to replace an asset when it wears out

Answer: (A)

Verified step by step guidance

1. Understand that depreciation in financial accounting refers to the process of allocating the cost of a tangible long-lived asset over its useful life, rather than expensing the entire cost at once.
2. Recognize that depreciation is a systematic and rational method, meaning it spreads the expense evenly or according to a pattern that reflects the asset's usage or wear and tear.
3. Note that depreciation does not increase the asset's market value or involve revaluations; it is about cost allocation, not valuation adjustments.
4. Understand that depreciation is not a one-time write-off; instead, it is recorded periodically (usually annually) to match the expense with the revenue generated by the asset.
5. Realize that depreciation is an accounting concept and does not involve setting aside cash; it is a non-cash expense that affects the income statement and the asset's book value on the balance sheet.