Utah Contractor Practice Exam

What type of assets is depreciation taken on?

1. Loans

2. Current assets

3. Fixed assets

4. None of the above

The correct answer is: Fixed assets

Depreciation is taken on fixed assets, which are long-term tangible assets that a company uses in its operations to generate income. These assets have a useful life extending beyond one year and include items such as buildings, machinery, vehicles, and equipment. Depreciation is the process of allocating the cost of these fixed assets over their useful lives to account for wear and tear, obsolescence, and amortization. This systematic reduction in the book value of fixed assets allows businesses to match the cost of using such assets to the revenue they generate over time. This not only provides a more accurate financial picture of the company's profitability but also ensures compliance with accounting standards. In contrast, loans represent a financial liability rather than an asset, and current assets are typically short-term assets expected to be converted into cash within one year, such as inventory or accounts receivable. These do not typically involve depreciation because they either do not have a long-term lifespan or do not lose value in the same way fixed assets do. Thus, the choice of fixed assets as the type of assets on which depreciation is taken is indeed correct.