The correct answer is that when a long-term asset is depreciated, it is recorded as an operating expense. This stems from the nature of depreciation, which allocates the cost of a tangible asset over its useful life.
Operating expenses include costs that are necessary to run the business on a daily basis, and depreciation fits into this category because it represents a systematic reduction of the asset's book value as it is used in operations. By recognizing depreciation as an operating expense, businesses can match the cost of the asset with the revenue it helps generate over time, adhering to the matching principle in accounting.
For example, if a company purchases machinery as a long-term asset, the cost of the machinery won't be fully expensed in the year it is purchased. Instead, the company will record depreciation expenses periodically, spreading out this cost to better reflect economic reality and financial performance.
In contrast, a capital expense refers to the expenditure made to acquire or improve a long-term asset, which is not deducted in the income statement as an expense until the asset is depreciated. Fixed expenses are costs that do not change with production levels, while variable expenses fluctuate with the volume of production. Depreciation, being linked to the asset's utilization, aligns more closely with