Chartered Financial Analyst (CFA) Level 1 Practice Exam 2025 - Free CFA Level 1 Practice Questions and Study Guide

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In accounting, what does "depreciation" represent?

The increase in the value of an asset over time

The allocation of the cost of a tangible asset over its useful life

Depreciation represents the allocation of the cost of a tangible asset over its useful life. This accounting process allows companies to spread the initial cost of the asset across the periods it is used, reflecting the asset's consumption and wear over time. As tangible assets, such as machinery or buildings, lose value due to factors like wear and tear or obsolescence, depreciation serves to provide a more accurate picture of the asset's value and the company's expense profile in financial statements.

This approach aligns with the matching principle in accounting, which dictates that expenses should be matched to the revenues they help generate in the same accounting period. By recognizing depreciation, businesses can better assess their performance and maintain an accurate representation of their financial condition.

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The payment of dividends to shareholders

The total liabilities of a company

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