Which term describes reducing the book value of a fixed asset over time?

Which term describes reducing the book value of a fixed asset over time?

• A. Amortization
• B. Depreciation
• C. Depletion
• D. Impairment

Answer: (B)

Depreciation is the process of systematically reducing the book value of a tangible fixed asset over its useful life to reflect wear, aging, and usage. Each period, depreciation expense is recorded, and the asset’s carrying amount on the balance sheet declines as accumulated depreciation grows. This mirrors how the asset gradually loses value as it’s used. Amortization describes the same idea but for intangible assets like patents or software. Depletion applies to natural resources, allocating cost as resources are extracted or consumed. Impairment is a potential, generally non-scheduled write-down when the asset’s recoverable amount falls below its carrying value due to events or changes in market conditions.

Depreciation is the process of systematically reducing the book value of a tangible fixed asset over its useful life to reflect wear, aging, and usage. Each period, depreciation expense is recorded, and the asset’s carrying amount on the balance sheet declines as accumulated depreciation grows. This mirrors how the asset gradually loses value as it’s used.

Amortization describes the same idea but for intangible assets like patents or software. Depletion applies to natural resources, allocating cost as resources are extracted or consumed. Impairment is a potential, generally non-scheduled write-down when the asset’s recoverable amount falls below its carrying value due to events or changes in market conditions.