Which of the following statements best describes the purpose of depreciation?
AAllocation of the cost of an asset to the periods in which services are received from the asset
BRegular reduction of asset value to correspond to changes in market value as the asset ages
CA process of correlating the market value of an asset with its gradual decline in physical efficiency
DAllocation of cost in a manner that will ensure that Plant and Equipment items are not carried on the Balance Sheet in excess of net realizable value
Correct answer
A. Allocation of the cost of an asset to the periods in which services are received from the asset
Explanation
AS-6 defines depreciation as a measure of the wearing out, consumption or other loss of value of a depreciable asset arising from use, effluxion of time or obsolescence through technology and market changes. Depreciation is allocated so as to change a fair proportion of the depreciable amount in each accounting period during the expected useful life of the asset. Depreciation includes amortization of assets whose useful life is predetermined. The ultimate outcome of accounting for depreciation is cash available to replace the asset; however this cannot be the purpose of depreciation.