A clothing manufacturing business buys equipment for $100,000 with depreciation expense of $10,000 per year. Where would you adjust the accounting equation to show depreciation one year later?

A clothing manufacturing business buys equipment for $100,000 with depreciation expense of $10,000 per year. Where would you adjust the accounting equation to show depreciation one year later?

• A. Both the asset and equity portion would change by the same amount of the depreciation.
• B. Under liabilities
• C. Under equity
• D. There would be no impact on the accounting equation.

Answer: (A)

Depreciation affects both sides of the accounting equation: it lowers the asset’s net value and reduces equity through lower retained earnings, keeping the equation balanced. The entry records a 10,000 depreciation expense (debit) and increases accumulated depreciation (credit) by 10,000. The asset side falls by 10,000 because the net book value of equipment decreases from 100,000 to 90,000 (through accumulated depreciation). The equity side falls by 10,000 because the expense reduces net income, which reduces retained earnings. Liabilities don’t change. So both the asset portion and the equity portion change by the same amount, preserving balance.

Depreciation affects both sides of the accounting equation: it lowers the asset’s net value and reduces equity through lower retained earnings, keeping the equation balanced.

The entry records a 10,000 depreciation expense (debit) and increases accumulated depreciation (credit) by 10,000. The asset side falls by 10,000 because the net book value of equipment decreases from 100,000 to 90,000 (through accumulated depreciation). The equity side falls by 10,000 because the expense reduces net income, which reduces retained earnings. Liabilities don’t change. So both the asset portion and the equity portion change by the same amount, preserving balance.