Question

Choose the correct statement _________________________.

• A. The term depreciation, depletion and amortization are not synonymous
• B. The main object of charging the profit and loss account with depreciation is to spread the cost of an asset over its useful life for the purpose of income measurement
• C. In case of diminishing balance method, the asset gets reduced to zero
• D. Machine hour rate per unit $=$ Acquisition cost $-$ Residual value/ Estimated life in years

Answer 1

The correct option is B The main object of charging the profit and loss account with depreciation is to spread the cost of an asset over its useful life for the purpose of income measurement

The purpose of depreciation is to achieve the matching principle of accounting. That is, a company is attempting to match the historical cost of a productive asset (that has a useful life of more than a year) to the revenues earned from using the asset.

Since it is difficult to precisely match a productive asset's cost to a company's revenues, the asset's cost is usually allocated to the years in which the asset is used. In other words, depreciation systematically moves the asset's cost from the balance sheet to depreciation expense on the income statement over the asset's useful life. Accountants point out that depreciation is an allocation process which does not result in reporting the asset's market value.