Depreciation is which type of cost?

Expired cost

The correct answer is option 1- Expired cost.

Depreciation is that part of the cost of a fixed asset which has expired on account of its usage and/or lapse of time. Hence, depreciation is an expired cost or expense, charged against the revenue of a given accounting period.

For example, a machine is purchased for ₹1,00,000 on April 01, 2017. The useful life of the machine is estimated to be 10 years. It implies that the machine can be used in the production process for next 10 years. ₹1,00,000 is a capital expenditure during the year 2017-18. However, when income statement (Statement of Profit and Loss) is prepared, the entire amount of ₹1,00,000 can not be charged against the revenue for the year 2017-18, because of the reason that the capital expenditure amounting to ₹1,00,000 is expected to derive benefits (or revenue) for 10 years and not one year. Therefore, it is logical to charge only a part of the total cost say ₹10,000 (one tenth of ₹1,00,000) against the revenue for the year 2017-18. This part represents the expired cost or loss in the value of machine on account of its use or passage of time and is referred to as ‘Depreciation’. The amount of depreciation, being a charge against profit, is debited to Income Statement (Statement of Profit and Loss).