Meaning of Depreciation - SS1 Accounting Past Questions and Answers - page 1
What is depreciation?
The process of allocating the cost of a tangible asset over its useful life
The process of selling a tangible asset at the end of its useful life
The process of increasing the value of a tangible asset over time
The process of recording the cost of intangible assets on the balance sheet
What types of assets are usually subject to depreciation?
Fixed assets such as buildings, vehicles, equipment, and machinery
Current assets such as cash, inventory, and accounts receivable
Intangible assets such as patents, trademarks, and copyrights
All of the above
What is the purpose of calculating depreciation?
To account for the eventual loss in value of a fixed asset
To increase the value of a fixed asset on the balance sheet
To reduce the company's taxable income
All of the above
How is the amount of depreciation taken each year calculated?
Using a specific formula based on the cost of the asset, its estimated useful life, and its estimated salvage value at the end of its useful life
Based on the current market value of the asset
Based on the company's current income
Using a formula based on the company's total assets
What is the difference between tangible and intangible assets?
Tangible assets are physical assets that have a finite useful life, such as buildings, vehicles, equipment, and machinery. Intangible assets are non-physical assets that lack a physical presence but have value, such as patents, trademarks, and copyrights.
How does depreciation affect a company's financial statements?
Depreciation reduces the value of a fixed asset on the company's balance sheet, which in turn reduces the company's taxable income. This means that the company pays less in taxes and has a lower net income. Additionally, depreciation is a non-cash expense that does not affect the company's cash flow.