Future Business Leaders of America (FBLA) Agribusiness Practice Test

What is the purpose of a depreciation system in accounting?

1. To maximize the asset's market value

2. To distribute the cost of tangible capital assets over their estimated life

3. To increase the overall profit of a business

4. To minimize expenses through asset liquidation

The correct answer is: To distribute the cost of tangible capital assets over their estimated life

The purpose of a depreciation system in accounting is to distribute the cost of tangible capital assets over their estimated useful life. This approach allows businesses to match the expense of using an asset with the revenue it generates over time. By doing so, depreciation helps to accurately reflect the asset's wear and tear, obsolescence, or reduction in value as it is utilized in business operations. This systematic allocation of costs also provides a clearer picture of financial performance, enabling stakeholders to better understand how investments in fixed assets impact profitability over time. For example, rather than recording the entire cost of an asset as an expense in the year of purchase— which could significantly distort financial statements—depreciation spreads this cost across several periods, aligning it more closely with the asset's contribution to revenue generation. While maximizing an asset's market value, increasing overall profit, and minimizing expenses through liquidation might be considerations in financial management, they do not describe the primary purpose of a depreciation system, which is fundamentally about cost allocation and financial reporting.