What is the impact of not recording depreciation on financial statements?

What is the impact of not recording depreciation on financial statements?

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 financial statements include the balance sheet and income statement.
Step 3: Know that assets on the balance sheet should reflect their current value, which decreases over time due to depreciation.
Step 4: If depreciation is not recorded, the value of assets on the balance sheet remains higher than it should be.
Step 5: Understand that expenses on the income statement include depreciation. If it's not recorded, expenses are lower.
Step 6: Realize that lower expenses lead to higher net income, which can mislead stakeholders about the company's profitability.
Step 7: Conclude that not recording depreciation results in overstated assets, understated expenses, and inflated net income.

No concepts available.