On which financial statement is depreciation expense typically reported?

On which financial statement is depreciation expense typically reported?

• A. Balance sheet
• B. Income statement
• C. Statement of cash flows
• D. Statement of retained earnings

Answer: (B)

Depreciation expense represents the cost of using fixed assets allocated to the period in which the assets help generate revenue. It is recorded on the income statement as an operating expense, because that statement shows all costs that reduce profitability for the period. The balance sheet reflects the asset’s accumulated depreciation as a deduction from the asset’s value, not as a periodic expense entry. The cash flow statement treats depreciation as a non-cash charge and adds it back to net income in operating activities to reconcile to cash flow from operations. The statement of retained earnings shows changes in retained earnings from net income and dividends, so depreciation’s effect flows through net income rather than appearing as a separate line item there. So, the expense is best shown on the income statement, where period costs that reduce profitability are reported.

Depreciation expense represents the cost of using fixed assets allocated to the period in which the assets help generate revenue. It is recorded on the income statement as an operating expense, because that statement shows all costs that reduce profitability for the period. The balance sheet reflects the asset’s accumulated depreciation as a deduction from the asset’s value, not as a periodic expense entry. The cash flow statement treats depreciation as a non-cash charge and adds it back to net income in operating activities to reconcile to cash flow from operations. The statement of retained earnings shows changes in retained earnings from net income and dividends, so depreciation’s effect flows through net income rather than appearing as a separate line item there. So, the expense is best shown on the income statement, where period costs that reduce profitability are reported.