If an adjusting entry includes a debit to Depreciation Expense and a credit to Accumulated Depreciation, what is the primary purpose of this adjustment?

• A. To correct an error in the cash account
• B. To recognize revenue earned but not yet received
• C. To record the purchase of a new asset
• D. To allocate the cost of a fixed asset over its useful life

Answer: (D)

Verified step by step guidance

1. Understand the concept of depreciation: Depreciation is the systematic allocation of the cost of a fixed asset over its useful life. This ensures that the expense is matched with the revenue generated by the asset during its usage period.
2. Identify the accounts involved: Depreciation Expense is an income statement account that reflects the cost allocated for the current period, while Accumulated Depreciation is a contra-asset account on the balance sheet that accumulates the total depreciation recorded over time.
3. Recognize the purpose of the adjusting entry: The primary purpose of this adjustment is to allocate the cost of the fixed asset over its useful life, ensuring compliance with the matching principle in accounting.
4. Understand why other options are incorrect: The adjustment does not correct an error in the cash account, recognize revenue earned but not yet received, or record the purchase of a new asset. These are unrelated to depreciation adjustments.
5. Relate the adjustment to financial reporting: This entry ensures that the financial statements accurately reflect the expense associated with using the fixed asset during the period, providing a true and fair view of the company's financial position.