Which statement about depreciation is true?

Which statement about depreciation is true?

• A. Depreciation reduces net income and reduces net book value through accumulated depreciation.
• B. Depreciation increases cash.
• C. Depreciation increases asset value.
• D. Depreciation has no effect on income statement.

Answer: (A)

Depreciation represents allocating the cost of a tangible asset over its useful life. It is a non-cash expense, recorded on the income statement, which lowers net income each period. On the balance sheet, depreciation increases accumulated depreciation, a contra-asset account that reduces the asset’s carrying amount (net book value). Because no cash is paid when depreciation is recorded, it does not increase cash. It also does not increase the asset’s value; instead, it reduces the asset’s book value over time. Finally, it does affect the income statement, so the statement that it has no effect on the income statement isn’t correct.

Depreciation represents allocating the cost of a tangible asset over its useful life. It is a non-cash expense, recorded on the income statement, which lowers net income each period. On the balance sheet, depreciation increases accumulated depreciation, a contra-asset account that reduces the asset’s carrying amount (net book value). Because no cash is paid when depreciation is recorded, it does not increase cash. It also does not increase the asset’s value; instead, it reduces the asset’s book value over time. Finally, it does affect the income statement, so the statement that it has no effect on the income statement isn’t correct.