Multiple Choice
How does the adjusting entry for depreciation differ from other deferral adjustments in financial accounting?
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3. Accrual Accounting Concepts
Adjusting Entries: Depreciation
Multiple Choice
Which of the following accounts are affected by the journal entry to record depreciation expense?
A
Debit Depreciation Expense; Credit Equipment
B
Debit Accumulated Depreciation; Credit Depreciation Expense
C
Debit Equipment; Credit Depreciation Expense
D
Debit Depreciation Expense; Credit Accumulated Depreciation
Verified step by step guidance1
Understand the concept of depreciation: Depreciation is the allocation of the cost of a tangible asset over its useful life. It reflects the wear and tear or obsolescence of the asset over time.
Identify the correct accounts involved in recording depreciation: Depreciation Expense is an income statement account that represents the cost of using the asset during the period, while Accumulated Depreciation is a contra-asset account on the balance sheet that reduces the value of the asset.
Analyze the journal entry: The correct journal entry to record depreciation is 'Debit Depreciation Expense; Credit Accumulated Depreciation.' This reflects the expense incurred and the reduction in the asset's book value.
Understand why Equipment is not credited: Equipment represents the original cost of the asset and is not directly reduced when recording depreciation. Instead, Accumulated Depreciation is credited to show the reduction in the asset's value over time.
Review the impact on financial statements: Depreciation Expense reduces net income on the income statement, while Accumulated Depreciation reduces the book value of Equipment on the balance sheet, providing a clearer picture of the asset's net value.
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