Oregon Construction Contractors (CCB) Practice Test

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What is the process of reducing the value of a fixed asset over time due to wear and tear?

Depreciation
Amortization
Appreciation
Valuation

The correct answer is: Depreciation

Depreciation is the process of reducing the value of a fixed asset over time, primarily due to wear and tear resulting from use, age, or obsolescence. This accounting method allows businesses to allocate the cost of an asset over its useful life, reflecting a more accurate representation of its value on financial statements. It ultimately impacts financial reporting, tax calculations, and cash flow management. In contrast, amortization relates specifically to the gradual expensing of intangible assets or certain types of long-term liabilities over time, not physical assets. Appreciation, on the other hand, refers to an increase in the value of an asset, which is the opposite of depreciation. Valuation is the process of determining the current worth of an asset or a company, rather than the systematic reduction of its value over time. Therefore, depreciation is the most appropriate term for the scenario described.