Question

When a company invests in a long-lived asset (a Long Term asset) it creates an accounting problem: if the asset had a limited useful life, then at some point it will have a value of zero (or close to zero). The day we purchase the asset it has a high value, and someday it will have a minimal value- how to appropriately allocate the expense of the asset as er gradually reduce the value of the asset on the Balance Sheet? The process of "depreciation" was created to address that problem in accordance with the "matching concept"

Explain (in two or three sentences) how depreciation conforms to the "matching concept".

Answer 1

When an Asset is purchased ithe asset will always be capitalised and will not be recognised as an expense,This is because the benefit of the asset is yet to be received.

Gradually when time passes,with the operations of the asset we will be receiving its benefits part by part and when its benefits are received we need to recognise the benefit as expenses in the form of depreciation.

With the operations of the asset we would have generated some revenue, to match these revenue there is an expen that occurred when we used this asset wich is termed as depreciation