Florida General Contractor Practice Exam

What is the process called for writing off company expenses over several years?

1. Amortization

2. Depreciation

3. Capitalization

4. Accrual

The correct answer is: Depreciation

The process of writing off company expenses over several years is referred to as depreciation. This accounting method is used to allocate the cost of tangible assets, such as buildings or machinery, over their useful lives. By spreading the expense across multiple years, businesses can match the cost of the asset with the revenue it generates, providing a more accurate picture of financial performance over time. Depreciation is particularly important for fixed assets, as it reflects the decreasing value of these assets as they are used and age. This method not only helps in financial reporting but also provides tax benefits by reducing taxable income. In contrast, amortization is typically applied to intangible assets, such as patents or copyrights, while capitalization involves recording a cost as a long-term asset rather than an expense, affecting the balance sheet differently. The accrual method of accounting focuses on recognizing revenues and expenses when they are incurred, regardless of cash transactions, and is not a direct process for writing off expenses over time.