Multiple Choice
When adjusting for depreciation at the end of an accounting period, which of the following journal entries is typically made?
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3. Accrual Accounting Concepts
Adjusting Entries: Depreciation
Multiple Choice
Why is it necessary to make a recurring journal entry for the depreciation of a vehicle?
A
To record the cash outflow when the vehicle is purchased.
B
To recognize revenue earned from using the vehicle.
C
To systematically allocate the cost of the vehicle over its useful life in accordance with the matching principle.
D
To increase the market value of the vehicle on the balance sheet.
Verified step by step guidance1
Understand the concept of depreciation: Depreciation is the systematic allocation of the cost of a tangible asset, such as a vehicle, over its useful life. This ensures that the expense is recognized in the periods when the asset contributes to generating revenue, adhering to the matching principle.
Review the matching principle: The matching principle in accounting states that expenses should be recognized in the same period as the revenues they help generate. Depreciation aligns with this principle by spreading the cost of the vehicle over its useful life.
Identify the purpose of recurring journal entries: Recurring journal entries for depreciation are necessary to reflect the gradual reduction in the asset's value on the balance sheet and to record the depreciation expense on the income statement periodically.
Clarify why other options are incorrect: Depreciation does not record cash outflows (cash outflows occur at the time of purchase), does not recognize revenue earned from using the vehicle, and does not increase the market value of the vehicle on the balance sheet.
Conclude the correct answer: The recurring journal entry for depreciation is necessary to systematically allocate the cost of the vehicle over its useful life in accordance with the matching principle, ensuring accurate financial reporting.
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