Certified Pennsylvania Evaluator Practice Exam

Which concept explains the reduction in value of an asset over time?

1. Market Value

2. Depreciation

3. Accrued Depreciation

4. Appraised Value

The correct answer is: Depreciation

The concept that explains the reduction in value of an asset over time is depreciation. Depreciation is an accounting method used to allocate the cost of a tangible asset over its useful life. This reduction in value occurs for various reasons, including wear and tear, obsolescence, or changes in market conditions. By recognizing depreciation, businesses can more accurately reflect the true value of their assets on their financial statements. This practice not only helps in understanding the asset's current worth but also plays a crucial role in tax calculations and financial planning. Other concepts listed relate to valuation but do not specifically address the aspect of decreasing value over time. Market value refers to the price at which an asset would trade in a competitive auction setting. Accrued depreciation specifically refers to the difference between the cost of an asset and its current value, emphasizing the total depreciation that has accumulated. Appraised value reflects an estimated worth determined by a professional appraiser, but it does not inherently convey the time-related reduction in value like depreciation does.