Which statement about accumulated depreciation is true?

Which statement about accumulated depreciation is true?

• A. It is a liability
• B. It is an asset
• C. It is a contra-asset that reduces the net book value of assets
• D. It increases depreciation expense in the income statement

Answer: (C)

The idea being tested is that accumulated depreciation is a contra-asset. It’s the cumulative amount of depreciation recorded against a fixed asset over its life, and it sits on the balance sheet as a deduction from the asset’s cost. Because it’s a contra-asset, it has the opposite (credit) balance to the asset’s (debit) balance, and it reduces the asset’s carrying amount, giving you the net book value (cost minus accumulated depreciation). For example, if a machine costs 100,000 and has 40,000 of accumulated depreciation, the net book value shown on the balance sheet is 60,000. This reflects the asset’s reduced value over time due to wear and tear. It’s not a liability, and it’s not an asset. Also, accumulated depreciation doesn’t directly increase the depreciation expense reported on the income statement; that expense is the current period’s depreciation, while accumulated depreciation is the total that has been expensed to date and is shown on the balance sheet as a deduction from the asset’s cost.

The idea being tested is that accumulated depreciation is a contra-asset. It’s the cumulative amount of depreciation recorded against a fixed asset over its life, and it sits on the balance sheet as a deduction from the asset’s cost. Because it’s a contra-asset, it has the opposite (credit) balance to the asset’s (debit) balance, and it reduces the asset’s carrying amount, giving you the net book value (cost minus accumulated depreciation).

For example, if a machine costs 100,000 and has 40,000 of accumulated depreciation, the net book value shown on the balance sheet is 60,000. This reflects the asset’s reduced value over time due to wear and tear.

It’s not a liability, and it’s not an asset. Also, accumulated depreciation doesn’t directly increase the depreciation expense reported on the income statement; that expense is the current period’s depreciation, while accumulated depreciation is the total that has been expensed to date and is shown on the balance sheet as a deduction from the asset’s cost.