SAP Business One Certification Practice Exam

How is depreciation considered in a company's financial statements?

1. As a profit

2. As a liability

3. As an asset

4. As an expense

The correct answer is: As an expense

Depreciation is recognized in a company's financial statements as an expense. This accounting practice allows a business to allocate the cost of tangible fixed assets over their useful lives rather than expensing the entire cost in the year of purchase. By doing so, depreciation reflects the decrease in value of the asset as it is used in operations, which aligns the expense recognition with the revenue generated from the asset. In the income statement, depreciation is listed as an operating expense, reducing the overall profit for the period. This method supports adherence to the matching principle in accounting, ensuring that the expenses incurred in generating revenue are recorded in the same period as the revenue they help to produce. It ultimately provides a more accurate picture of a company's financial performance over time. Other options, such as considering depreciation as a profit, liability, or asset, would not accurately represent the nature of depreciation in accounting. Profit represents earning after all expenses have been deducted; liabilities refer to obligations the company owes; and assets are resources owned by the company. Depreciation specifically represents the allocation of an expense related to asset usage, not any of these other financial elements.