The allocation of the cost of a plant asset over the periods expected to benefit from its use is called depreciation.
Group of answer choices
True
False
The correct answer and explanation is:
The correct answer is True.
Depreciation refers to the systematic allocation of the cost of a plant asset over its useful life. Plant assets are long-term tangible assets used in a company’s operations to generate revenue, such as buildings, machinery, or equipment. Instead of recording the entire cost of the asset as an expense in the year it was purchased, depreciation spreads that cost across multiple years in which the asset is expected to be used.
This approach reflects the matching principle in accounting, which states that expenses should be recognized in the same period as the revenues they help generate. Depreciation thus ensures that the asset’s cost is matched with the revenue it contributes to, making financial statements more accurate over time.
Several methods are used to calculate depreciation, with the most common being straight-line depreciation, declining balance depreciation, and units-of-production depreciation. Each method spreads the expense differently, but all are intended to allocate the asset’s cost over its useful life in a way that reflects its usage and economic benefits.
For example, if a company purchases a machine for $10,000 and expects it to be useful for 10 years, under the straight-line method, the company would expense $1,000 of depreciation each year for 10 years. This process continues until the asset’s book value is reduced to its estimated residual value (the asset’s value at the end of its useful life).
By allocating the asset’s cost over time, depreciation helps provide a more accurate representation of the company’s financial position and performance, while also allowing for tax deductions related to the asset’s use.