Tennessee Business and Law Practice Exam 2025 – Complete Test Prep Guide

Question: 1 / 400

Depreciation is classified as which type of expense?

Cash expense

Fixed expense

Variable expense

Non-cash expense

Depreciation is categorized as a non-cash expense because it reflects the allocation of the cost of a tangible asset over its useful life rather than an immediate cash outflow. When a business purchases an asset, such as machinery or equipment, the purchase price is a cash expense at that moment. However, depreciation spreads the cost of that asset over several accounting periods, allowing the business to match the asset's cost with the revenue it generates over time. This accounting practice does not involve cash transactions during the periods in which the depreciation is recorded; therefore, it is classified as a non-cash expense.

This classification is essential for understanding a company's financial health, as it helps in evaluating cash flows and profitability without the influence of non-cash accounting entries.

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