What is the effect of the adjusting entry for depreciation expense at the end of an accounting period?

• A. It increases Depreciation Expense and increases Accumulated Depreciation.
• B. It decreases Depreciation Expense and increases Equipment.
• C. It increases Depreciation Expense and decreases Equipment.
• D. It decreases Depreciation Expense and decreases Accumulated Depreciation.

Answer: (A)

Verified step by step guidance

1. Understand the concept of depreciation: Depreciation is the allocation of the cost of a tangible asset over its useful life. It reflects the wear and tear or obsolescence of the asset over time.
2. Recognize the accounts involved: Depreciation Expense is an income statement account that records the periodic cost of using the asset, while Accumulated Depreciation is a contra-asset account on the balance sheet that reduces the book value of the asset.
3. Determine the effect of the adjusting entry: At the end of the accounting period, the adjusting entry for depreciation increases Depreciation Expense (to reflect the cost incurred during the period) and increases Accumulated Depreciation (to accumulate the total depreciation recorded).
4. Understand why Equipment is not directly affected: The Equipment account remains unchanged because the reduction in value is recorded through Accumulated Depreciation, not by directly decreasing the Equipment account.
5. Review the correct answer: The correct effect of the adjusting entry is that it increases Depreciation Expense and increases Accumulated Depreciation, as this reflects the periodic allocation of the asset's cost and its accumulated reduction in value.