Certified Pennsylvania Evaluator Practice Exam

What is meant by accrual for depreciation?

1. Estimating future increases in property value

2. Determining the present value of a property

3. Estimating future depreciation amounts

4. Calculating the total cost of insurance

The correct answer is: Estimating future depreciation amounts

Accrual for depreciation refers to the systematic allocation of the cost of a tangible asset over its useful life. This concept acknowledges that assets lose value as they age, which is a normal part of their use in operations. Therefore, estimating future depreciation amounts is essential for accurate financial reporting. It ensures that the expense recognized in the financial statements reflects the economic reality of asset usage and value decline over time. This kind of estimation helps businesses and evaluators understand how an asset’s value will decrease, which plays a critical role in financial analysis, budgeting, and tax planning. It also ensures that financial statements present a true and fair view of the business's financial health by matching costs with the revenues generated by those assets in the periods they are used.