Question

why are long term assets depreciated over the useful life of the assets and not shown as an expense in the year they are purchased?

Answer 1

As per the GAAP, expenses incurred towards purchase of assets or making improvements need to be capitalised as these expenses generate visible economic benefits over multiple financial years. Hence such expenses are recognised first as 'Assets' and subsequently a proportionate amount from recognised asset will be expensed as 'Depreciation' or 'Amortisation'. Such depreciation or amortisation will be charged over the life the asset until the asset is disposed off or until. It reaches the salvage state, whichever is earlier.

Since these assets generate economic benefits over multiple financial periods, the total capitalised cost needs to be charged systematically over the life of asset using any of the various methods of depreciation. Charging depreciation also generates a true and accurate picture of the financial performance and financial position of the business enterprise.