Which describes depreciation?

• A. The process of a business buying new assets.
• B. The increase in value of an asset over time.
• C. Spreading out the cost of an item over the expected life of the item.
• D. The process of adjusting market value for an asset.

Answer: (C)

Depreciation is the allocation of an asset’s cost over the period it’s expected to be used. In accrual accounting, you assign a portion of the purchase price as a depreciation expense each period, which matches the asset’s use to the revenues it helps generate. This approach lowers reported income without requiring cash every period and gradually reduces the asset’s book value on the balance sheet as the asset wears out or becomes obsolete. It’s not about purchasing new assets, not about the asset increasing in value, and not about adjusting market value for current conditions—the focus here is spreading the cost over time to reflect consumption.