Future Business Leaders of America (FBLA) Accounting Practice Test

Which of the following best describes "depreciation"?

1. A method to determine the resale price of an asset

2. A systematic reduction in the recorded cost of an asset

3. The total cost incurred for maintaining an asset

4. A method to increase the asset's market value

The correct answer is: A systematic reduction in the recorded cost of an asset

Depreciation is best described as a systematic reduction in the recorded cost of an asset. This accounting process is crucial for allocating the cost of a tangible fixed asset over its useful life. By systematically reducing the asset's value on the financial statements, businesses can reflect the wear and tear or obsolescence the asset undergoes over time. This approach helps provide a more accurate picture of the company's financial health and profitability. In accounting, depreciation allows businesses to match the expense of using the asset with the revenue it generates, adhering to the matching principle. This not only impacts the balance sheet by reducing the asset's carrying amount but also influences the income statement through periodic depreciation expenses, thus affecting net income. The other choices do not accurately represent the concept of depreciation. Determining the resale price of an asset focuses on its market value rather than the systematic reduction of its cost. The total cost of maintaining an asset involves ongoing expenses for upkeep and does not connect to the accounting treatment of the asset's value over time. Lastly, increasing an asset's market value contradicts the fundamental purpose of depreciation, which is to reflect a decrease in value as the asset ages.