How does the adjusting entry for depreciation differ from other deferral adjustments in financial accounting?

• A. Depreciation adjustments are made only at the time of asset purchase, while other deferral adjustments are made at period-end.
• B. Depreciation adjustments always increase both assets and revenues, unlike other deferral adjustments.
• C. Depreciation adjustments do not affect the income statement, whereas other deferral adjustments do.
• D. Depreciation adjustments allocate the cost of a long-term asset over its useful life, while other deferral adjustments typically involve recognizing previously deferred revenues or expenses.

Answer: (D)

Verified step by step guidance

1. Understand the concept of depreciation: Depreciation is the systematic allocation of the cost of a tangible long-term asset over its useful life. This ensures that the expense is matched with the revenue it helps generate, adhering to the matching principle in accounting.
2. Recognize the purpose of deferral adjustments: Deferral adjustments are made to recognize revenues or expenses that were previously deferred. For example, unearned revenue is adjusted to recognize revenue earned, or prepaid expenses are adjusted to recognize expenses incurred.
3. Identify the key difference: Depreciation adjustments specifically deal with allocating the cost of a long-term asset over time, while other deferral adjustments focus on recognizing revenues or expenses that were deferred in earlier periods.
4. Understand the impact on financial statements: Depreciation adjustments affect both the income statement (through depreciation expense) and the balance sheet (by reducing the asset's book value). Other deferral adjustments typically involve recognizing revenues or expenses that impact the income statement and related liability or asset accounts on the balance sheet.
5. Apply the correct accounting treatment: For depreciation, the adjusting entry involves debiting Depreciation Expense (income statement) and crediting Accumulated Depreciation (contra-asset account on the balance sheet). For other deferral adjustments, the entry depends on whether you are recognizing deferred revenue or expense, such as debiting an expense account and crediting a prepaid asset account.