In an adjusting entry for depreciation, how is depreciation expense reported in the financial statements?

• A. It is reported on the income statement as revenue and on the balance sheet as an increase to the asset’s historical cost.
• B. It is reported on the income statement as an expense, and the related accumulated depreciation is reported on the balance sheet as a contra-asset that reduces the asset’s carrying amount.
• C. It is reported on the statement of cash flows as an operating cash outflow because it reduces cash.
• D. It is reported on the balance sheet as a liability and on the income statement as other comprehensive income.

Answer: (B)

Verified step by step guidance

1. Understand that depreciation expense is the allocation of the cost of a tangible fixed asset over its useful life, reflecting wear and tear or obsolescence.
2. Recognize that depreciation expense is recorded on the income statement, which reduces net income as it is an operating expense.
3. Know that on the balance sheet, instead of directly reducing the asset's historical cost, depreciation accumulates in a separate contra-asset account called Accumulated Depreciation.
4. The Accumulated Depreciation account is subtracted from the asset's historical cost to arrive at the asset's carrying amount (book value) on the balance sheet.
5. Remember that depreciation does not involve cash outflow at the time of the adjusting entry, so it is not reported as a cash flow in the statement of cash flows.