International Association of Accessibility Professionals (IAAP) Certified Administrative Professional (CAP) Practice Exam

What is the accounting method called that allocates the cost of tangible assets over their useful life?

1. Depreciation

2. Amortization

3. Allocation

4. Valuation

The correct answer is: Depreciation

The accounting method that allocates the cost of tangible assets over their useful life is known as depreciation. Depreciation systematically reduces the recorded cost of an asset to reflect its use, wear, and obsolescence over time. This method allows businesses to spread the expense of an asset over the period it is expected to generate revenue, providing a more accurate picture of both the asset’s contribution to the business and the company’s financial situation. While amortization also involves the allocation of cost over time, it specifically applies to intangible assets, such as patents and copyrights, rather than tangible assets like machinery or buildings. Allocation is a broader term that may refer to various methods of distributing costs, but it does not specifically define the process used for tangible assets. Valuation refers to determining the current worth of an asset and does not encompass the concept of spreading costs over time. Thus, depreciation is the most precise term for this accounting practice.