Depreciation is the process of:

Question

Accepted Answer

The correct option is 2:
Depreciation is fundamentally and correctly defined in accounting as an **Allocation of cost**. The goal of depreciation is not to determine the current market value of an asset, but rather to distribute the historical cost of a tangible fixed asset over its estimated useful economic life in a systematic and rational manner. This practice is essential for adhering to the **Matching Principle**, ensuring that the expense of using the asset (its decline in utility) is recognized in the same accounting period as the revenue it helped to generate. By allocating the asset's cost over its life, businesses accurately reflect the consumption of the asset and arrive at a truer measure of periodic profit.

The incorrect options are 1, 3, and 4:
It is a crucial conceptual distinction in accounting that depreciation is an **allocation** process and not a **valuation** process. Option 1, Valuation of Assets, is incorrect because depreciation makes no attempt to measure the asset's current **market value** or fair value; it merely reduces the asset's book value (Cost minus Accumulated Depreciation) based on a predetermined formula. Since the core definition of depreciation is allocation of cost, Option 3 (Both (1) and (2)) is also incorrect, as including the inaccurate concept of valuation makes the entire statement false. Consequently, Option 4 (None of these) is incorrect because Option 2 accurately represents the nature of depreciation as required by accounting standards.