The contra account that includes total depreciation expense for all prior periods for which an asset was used:
Multiple Choice
Is only recorded when the asset is disposed of.
Is referred to as depreciation expense.
Is referred to as accumulated depreciation.
Is referred to as an accrued asset.
Is shown on the income statement of the final period.
The correct answer and explanation is :
The correct answer is:
“Is referred to as accumulated depreciation.”
Explanation:
Accumulated depreciation is a contra asset account that records the total amount of depreciation expense that has been recognized over the life of an asset. It is used to track the reduction in value of an asset over time due to wear and tear, obsolescence, or usage. Accumulated depreciation is subtracted from the asset’s original cost on the balance sheet to determine its net book value.
Key Points About Accumulated Depreciation:
- Contra Asset Account: Unlike normal asset accounts, which have a debit balance, accumulated depreciation has a credit balance because it reduces the book value of the asset.
- Not an Expense Account: Depreciation expense is recorded on the income statement, while accumulated depreciation is a balance sheet account.
- Updated Each Period: Every accounting period, a portion of the asset’s cost is allocated as depreciation expense, which increases the accumulated depreciation balance.
- Not Recorded Only on Disposal: Accumulated depreciation is maintained throughout the asset’s life and continuously updated each accounting period. When the asset is disposed of, the accumulated depreciation account is adjusted to remove the asset from the books.
- Affects Financial Statements: It provides a more accurate representation of an asset’s value over time, ensuring financial statements reflect the asset’s declining worth.
For example, if a company purchases a machine for $50,000 with a 10-year life and uses straight-line depreciation, the annual depreciation expense would be $5,000 per year. After three years, the accumulated depreciation would be $15,000 ($5,000 × 3), and the book value of the machine would be $35,000 ($50,000 – $15,000).
Now, I’ll generate an image illustrating accumulated depreciation.
