What is the effect of recording depreciation on financial statements?
Practice Questions
1 question
Q1
What is the effect of recording depreciation on financial statements?
Increases net income
Decreases net income
Has no effect on net income
Increases cash flow
Recording depreciation decreases net income as it is an expense that reduces profit.
Questions & Step-by-step Solutions
1 item
Q
Q: What is the effect of recording depreciation on financial statements?
Solution: Recording depreciation decreases net income as it is an expense that reduces profit.
Steps: 5
Step 1: Understand what depreciation is. Depreciation is the process of allocating the cost of a tangible asset over its useful life.
Step 2: Recognize that depreciation is considered an expense. When a company records depreciation, it is treating the loss of value of an asset as an expense.
Step 3: Know that expenses reduce net income. When expenses increase, net income (or profit) decreases.
Step 4: See how this affects financial statements. On the income statement, recording depreciation will show a lower net income because it is subtracted from total revenue.
Step 5: Understand the impact on the balance sheet. The asset's value on the balance sheet will decrease over time as depreciation is recorded.
