How is depreciation reflected on financial statements?

• A. Only the balance sheet shows depreciation as a liability.
• B. Only the income statement shows an increase in assets.
• C. It is not shown anywhere on financial statements.
• D. Income statement shows depreciation as an expense; balance sheet shows the asset's book value.

Answer: (D)

Depreciation represents the allocation of the cost of a fixed asset over its useful life, so it appears on both financial statements. On the income statement, depreciation is recorded as an expense, reducing operating income and net income for the period. On the balance sheet, the asset stays on the books at its original cost, but the accumulated depreciation reduces its carrying amount, so the asset’s net book value equals cost minus accumulated depreciation. It is not a liability, nor does it increase assets; depreciation simply spreads asset cost over time and shows up as an expense and as a contra-asset reducing the asset’s value.