Multiple Choice
Regarding adjusting entries for depreciation, which statement best describes the Accumulated Depreciation account?
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3. Accrual Accounting Concepts
Adjusting Entries: Depreciation
Multiple Choice
In adjusting entries for depreciation, Accumulated Depreciation is best described as which type of account?
A
An expense account that is reported on the income statement and represents cash paid for the asset
B
A contra-asset account that is reported on the balance sheet and reduces the related asset’s book value
C
A liability account that represents amounts owed to creditors for the purchase of fixed assets
D
A revenue account that represents the increase in value of long-lived assets over time
Verified step by step guidance1
Step 1: Understand the nature of Accumulated Depreciation. It is related to fixed assets and their usage over time, reflecting the allocation of the asset's cost as an expense.
Step 2: Recall that depreciation expense is recorded on the income statement, but Accumulated Depreciation itself is not an expense account; instead, it accumulates the total depreciation charged against an asset.
Step 3: Recognize that Accumulated Depreciation is reported on the balance sheet, not the income statement, and it reduces the book value of the related asset.
Step 4: Identify the type of account Accumulated Depreciation is by noting it has a credit balance that offsets the debit balance of the asset account, which classifies it as a contra-asset account.
Step 5: Conclude that Accumulated Depreciation is a contra-asset account reported on the balance sheet, reducing the carrying amount of the fixed asset.
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