What is depreciation used for in accounting?

• A. Estimating inflation rates
• B. Finding the value of fixed assets over time
• C. Calculating current market value of assets
• D. Assessing liquidity of a company

Answer: (B)

Depreciation in accounting is used to allocate the cost of a tangible fixed asset over its useful life. This systematic reduction of the asset's book value reflects its consumption, wear and tear, or obsolescence. By recognizing depreciation, companies can accurately match the expense of asset usage with the revenue generated from that asset, leading to a more accurate representation of financial performance.

This practice helps in understanding how much value an asset has lost over time, allowing businesses to plan for future capital expenditures. Recording depreciation also provides a more conservative view of asset values on the balance sheet, ensuring that financial statements reflect realistic values that can affect decisions made by investors, creditors, and management.

In contrast, estimating inflation rates, calculating the current market value of assets, and assessing liquidity do not directly relate to the purpose of depreciation. These activities serve different functions in financial management and reporting.