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What is the effect of recording depreciation on an asset?
What is the effect of recording depreciation on an asset?
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What is the effect of recording depreciation on an asset?
Increases asset value
Decreases asset value
Increases cash flow
Decreases liabilities
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Recording depreciation reduces the book value of the asset on the balance sheet.
Questions & Step-by-step Solutions
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Q: What is the effect of recording depreciation on an asset?
Solution:
Recording depreciation reduces the book value of the asset on the balance sheet.
Steps: 6
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Step 1: Understand what depreciation is. Depreciation is the process of allocating the cost of an asset over its useful life.
Step 2: Know that every asset has a value when it is purchased. This is called the 'book value'.
Step 3: Realize that as time passes, the asset loses value due to wear and tear or obsolescence.
Step 4: When depreciation is recorded, it means we are officially recognizing that the asset's value has decreased.
Step 5: This decrease in value is reflected on the balance sheet, which is a financial statement that shows what a company owns and owes.
Step 6: As a result, the book value of the asset is reduced, showing a more accurate financial position of the company.
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