Which statement best describes depreciation as a concept?

• A. The decrease in cash from paying expenses
• B. The increase in asset value due to market demand
• C. The recognition of all asset values at historical cost
• D. The systematic allocation of the cost of a tangible asset over its useful life

Answer: (D)

Depreciation is the systematic allocation of the cost of a tangible asset over its useful life. In accounting, assets provide benefits across several periods, so the expense is spread out to match the periods that benefit from the asset’s use. This approach doesn’t reflect a cash outflow each period; it records an expense representing the portion of the asset used. It also isn’t about asset value increasing with market demand, nor simply recognizing the asset at historical cost without spreading that cost over time. A common method is to take the asset’s cost minus any salvage value and divide by its estimated useful life to determine the periodic depreciation expense, with other methods like declining-balance or units-of-production used for different usage patterns.