Future Business Leaders of America (FBLA) Accounting Practice Test

What is the concept of accelerated depreciation?

1. A method to spread out asset costs evenly over time

2. A technique to recover asset costs faster in the earlier years

3. A way to increase the book value of assets

4. A method used exclusively for tax purposes

The correct answer is: A technique to recover asset costs faster in the earlier years

Accelerated depreciation refers to a method of allocating the cost of an asset over its useful life in such a way that a larger portion of the asset's cost is recorded as an expense in the earlier years of the asset’s life. This approach allows businesses to recover the costs associated with the asset more quickly than through straight-line depreciation, which spreads those costs evenly. The advantage of accelerated depreciation lies in its ability to match the potential higher revenues attributable to an asset’s early use with the appropriate expense recognition. This is particularly useful for businesses that experience rapid growth or when the asset is likely to generate more income in its initial years of service. It can also have favorable tax implications, as higher depreciation expenses reduce taxable income in the early years. The other choices provide different perspectives that do not align with the principles of accelerated depreciation. Spreading out asset costs evenly over time describes straight-line depreciation, increasing the book value is not applicable in the context of depreciation, and while accelerated depreciation can have tax benefits, it is not used exclusively for tax purposes but also for financial reporting and management decision-making.