Plant asset are depreciated over their useful lives. Which basic principle of accounting does this procedure reflect?
Plant asset are depreciated over their useful lives. Which basic principle of accounting does this procedure reflect?
The correct option is B Matching expenses with revenue.
Matching expenses with revenue.
The purpose of depreciation is to match the 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 hard to see a direct link to revenues,
the asset’s cost is usually allocated to the years in which the asset is used.
Depreciation systematically allocates or moves the asset’s cost from the
balance sheet to expense on the income statement over the asset’s useful life.
In other words, depreciation is an allocation process in order to achieve the
matching principle; it is not a technique for determining the fair market value
of the asset.
Matching expenses with revenue.
The purpose of depreciation is to match the 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 hard to see a direct link to revenues, the asset’s cost is usually allocated to the years in which the asset is used. Depreciation systematically allocates or moves the asset’s cost from the balance sheet to expense on the income statement over the asset’s useful life. In other words, depreciation is an allocation process in order to achieve the matching principle; it is not a technique for determining the fair market value of the asset.
