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What is the primary purpose of depreciation in financial accounting?
What is the primary purpose of depreciation in financial accounting?
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Practice Questions
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What is the primary purpose of depreciation in financial accounting?
To reduce taxable income.
To reflect the wear and tear of assets.
To increase cash flow.
To inflate asset values.
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The primary purpose of depreciation is to allocate the cost of tangible assets over their useful lives, reflecting their wear and tear.
Questions & Step-by-step Solutions
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Q
Q: What is the primary purpose of depreciation in financial accounting?
Solution:
The primary purpose of depreciation is to allocate the cost of tangible assets over their useful lives, reflecting their wear and tear.
Steps: 4
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Step 1: Understand that depreciation is a way to account for the cost of physical assets, like buildings or machinery.
Step 2: Recognize that these assets lose value over time due to use and aging, which is called wear and tear.
Step 3: Learn that depreciation spreads the initial cost of the asset over its useful life, meaning how long it can be used effectively.
Step 4: Realize that this helps businesses show a more accurate picture of their expenses and profits in financial statements.
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