Multiple Choice
When a company purchases a fixed asset, which of the following is deducted on the income statement in the period of purchase?
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3. Accrual Accounting Concepts
Adjusting Entries: Depreciation
Multiple Choice
Which of the following is the correct adjusting entry to record the depreciation of a building for the fiscal period?
A
Debit Depreciation Expense—Building; Credit Building
B
Debit Depreciation Expense—Building; Credit Accumulated Depreciation—Building
C
Debit Building; Credit Depreciation Expense—Building
D
Debit Accumulated Depreciation—Building; Credit Depreciation Expense—Building
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 during the fiscal period.
Identify the correct accounts involved: Depreciation Expense is an expense account that records the cost of depreciation for the period, and Accumulated Depreciation is a contra-asset account that accumulates the total depreciation recorded over time for the asset.
Recognize the correct adjusting entry format: The adjusting entry for depreciation involves debiting the Depreciation Expense account to increase expenses and crediting the Accumulated Depreciation account to increase the contra-asset balance.
Avoid common errors: Do not credit the Building account directly, as this would reduce the asset's value on the books, which is not the correct approach for recording depreciation. Instead, use the Accumulated Depreciation account to track the reduction in value.
Write the adjusting entry: The correct adjusting entry is 'Debit Depreciation Expense—Building; Credit Accumulated Depreciation—Building,' which properly reflects the expense and the accumulated reduction in the asset's value.
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