What are the effects of depreciation?

Definition of Depreciation

Depreciation is the systematic allocation of the cost of a company's assets used in its business from the balance sheet to the income statement (as an expense) over their estimated useful lives.

Depreciation occurs through an accounting adjusting entry in which the account Depreciation Expense is debited and the contra asset account Accumulated Depreciation is credited.

Effects of Depreciation

The following are some of the effects for a corporation that is depreciating assets:

  • The net income, retained earnings, and stockholders' equity are reduced with the debit to Depreciation Expense
  • The carrying value of the assets being depreciated and amount of total assets are reduced by the credit to Accumulated Depreciation
  • The depreciation expense reported on the U.S. income tax return (based on the tax regulations) reduces a corporation's taxable income (and its related income tax payments).

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