Estimating Practice Exam

Which term refers to the decline in market value of an asset?

1. Appreciation

2. Depreciation

3. Valuation

4. Asset Impairment

The correct answer is: Depreciation

The term that refers to the decline in market value of an asset is depreciation. Depreciation is commonly used in accounting to represent the decrease in value of tangible assets over time, often due to wear and tear, age, or obsolescence. This concept behaves in a predictable manner; it allows businesses to allocate the cost of an asset over its useful life, reflecting its gradual loss of value. In contrast, appreciation describes an increase in the value of an asset over time, while valuation is the process of determining the current worth of an asset or a company, rather than denoting a change in value. Asset impairment specifically refers to a situation where the market value of an asset falls below its carrying amount on the financial statements, typically due to specific adverse events or changes, but it does not universally encompass all assets experiencing a decline in value. Therefore, depreciation is the most accurate term for the general concept of a decrease in market value.