Question

Depreciation is sometimes called "accounting for the use of assets." Explain.

Answer 1

Depreciation is the allocation of the cost of the asset over its useful life. When the asset is purchased, its cost is spread over its useful life because the asset gives the benefit over its useful life. On purchase of asset, its entire cost is not expensed in the year of purchase. The use of asset is estimated in terms of its useful life. Then its cost is spread or allocated over the periods the asset will be in use. That allocated cost is called depreciation. Every year an amount equal to depreciation expense is charged in the income statement as expense for that year. Unallocated amount is carried forward as asset that will be charged as depreciation in the coming years. So, in this way depreciation is "accounting for the use of assets".