Which term describes the reduction in an asset’s value over its lifespan?

Depreciation / Amortization

Explanation:

Depreciation is an accounting concept that describes the process of allocating the cost of an asset over its meaningful life. Assets require a substantial amount of capital investments. Expensing the entire cost of an asset in one financial year is against the income and expense matching principle.

The business spreads the cost of the asset in each year that the asset is expected to generate revenue. The cost of the asset is divided equally with the number of its useful years. At the end of each year, the depreciation amount is charged to the profit and loss statement of the business.

Depreciation is the term used for tangible assets, while amortization is used for intangible assets. The two operate on the same concept.

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