Question

• Why certain long-lived assets are depreciated (amortized)? Explain.

Answer 1

Certain long lived assets are depreciated or amortized for the primary purpose of matching the ongoing use of the long lived asset with the economic benefits that are derived from those assets. It should be noted that assets can be tangible assets or intangible assets. Tangible assets are depreciated while intangible assets are amortized.

A long lived asset has a cost of acquisition and this cost has to be allocated to expense over a period of time. It should be noted that costs for all long lived assets are capitalized at the time of purchase. Then, in subsequent years, the cost is allocated as expenses in the income statement of the company. This allocation of cost will be for the same period for which the company is expected to derive economic benefits from that long lived asset. In other words depreciation and amortization of long lived assets accounts for decline in the carrying value of the asset over time.

To conclude certain long lived assets are depreciated or amortized as per the matching principle in accounting which states that revenue and all related expenses should appear in the income statement in the same reporting period.