Is depreciation expense a debit or credit explained

Is depreciation expense a debit or credit, a question that lies at the heart of understanding financial reporting and a critical component for any aspiring accountant or business owner. This examination delves into the fundamental principles governing this accounting concept, dissecting its mechanics and implications with a critical eye.

The purpose of depreciation is to systematically allocate the cost of a tangible asset over its useful life, reflecting the gradual reduction in its value due to wear and tear, obsolescence, or usage. Within the framework of double-entry bookkeeping, expenses inherently increase, and understanding how debits and credits interact with various account types is paramount to accurately recording these allocations.

The fundamental accounting equation, Assets = Liabilities + Equity, serves as the bedrock upon which these transactions are built, illustrating how every entry has a dual effect, maintaining the balance of the equation.

Fundamental Accounting Principles for Depreciation

To truly grasp whether depreciation expense is a debit or credit, we must first anchor ourselves in the foundational principles that govern the world of accounting. These principles are not mere abstract theories; they are the bedrock upon which all financial reporting is built, ensuring consistency, comparability, and transparency. Understanding these core concepts is like understanding the grammar of a language before attempting to write a novel.The very essence of accounting is captured in a simple yet profound equation that forms the backbone of the balance sheet: Assets = Liabilities + Equity.

This equation illustrates that everything a company owns (its assets) is financed by either what it owes to others (liabilities) or what its owners have invested and earned (equity). Every single transaction a business undertakes must maintain the balance of this equation.

The Accounting Equation Explained

The accounting equation is the fundamental identity in double-entry bookkeeping. It dictates that the total value of a company’s assets must always equal the sum of its liabilities and shareholders’ equity. This equation is not just a formula; it’s a representation of a company’s financial position at any given point in time.

• Assets: These are the resources controlled by the company from which future economic benefits are expected to flow. Examples include cash, accounts receivable, inventory, buildings, and machinery.
• Liabilities: These represent obligations of the company to transfer economic benefits to other entities in the future as a result of past transactions or events. Examples include accounts payable, salaries payable, and loans payable.
• Equity: This represents the residual interest in the assets of the entity after deducting all its liabilities. It typically comprises share capital and retained earnings.

The Nature of Expense Accounts in Double-Entry Bookkeeping

In the intricate dance of double-entry bookkeeping, every financial transaction affects at least two accounts. Expense accounts, in particular, play a crucial role in reflecting the costs incurred by a business in its operations. Understanding their behavior within this system is key to deciphering the debit/credit puzzle.Expenses are costs that a business incurs in the process of generating revenue. They represent a decrease in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other than those relating to distributions to equity participants.

The Purpose of Depreciation in Accounting

Depreciation is an accounting method used to allocate the cost of a tangible asset over its useful life. It’s not about tracking the market value of an asset but rather about systematically matching the expense of using an asset with the revenue it helps generate. This ensures that financial statements present a more accurate picture of a company’s profitability over time.The primary purpose of depreciation is to reflect the consumption of an asset’s economic benefits.

As a machine ages or a building deteriorates, its capacity to contribute to revenue diminishes. Depreciation accounts for this gradual decline in value and usefulness, preventing the entire cost of a long-lived asset from being expensed in the year of purchase, which would distort profitability.

The Impact of Recording an Expense on the Accounting Equation

When an expense is recorded, it directly influences the accounting equation. This impact is a consequence of the fundamental rules of double-entry bookkeeping and the nature of expenses. The recording of an expense is a critical event that alters a company’s financial standing.Recording an expense generally leads to a decrease in equity. This decrease occurs because expenses reduce a company’s net income, and net income, in turn, flows into retained earnings, which is a component of equity.

The balancing effect in the accounting equation is achieved through a corresponding decrease in an asset or an increase in a liability.

Expenses reduce Equity.

For instance, if a company incurs an expense for utilities, it might pay with cash (an asset). In this scenario, the expense account is debited, increasing the expense and decreasing equity, while the cash account is credited, decreasing the asset. Alternatively, if the utility bill is not yet paid, the expense account is debited, decreasing equity, and a liability account (like Accounts Payable) is credited, increasing liabilities.

Transaction Type	Impact on Assets	Impact on Liabilities	Impact on Equity
Recording an Expense (Paid with Cash)	Decrease	No Change	Decrease
Recording an Expense (On Credit)	No Change	Increase	Decrease

Understanding Debit and Credit Mechanics

In the grand theater of accounting, where every transaction plays a vital role, understanding the fundamental language of debits and credits is akin to mastering the script. These two pillars form the bedrock of the double-entry bookkeeping system, ensuring that for every action, there is an equal and opposite reaction, maintaining the delicate balance of financial statements. It’s a dance of increase and decrease, a constant ebb and flow that paints a clear picture of a company’s financial health.The mechanics of debits and credits are not arbitrary; they are a systematic way of recording financial events.

Imagine them as opposing forces, each with a specific role depending on the nature of the account they interact with. This duality is what allows for the intricate yet elegant representation of financial reality.

Account Types and Debit/Credit Effects

The impact of a debit or credit hinges entirely on the type of account it affects. This fundamental principle dictates whether an entry signifies an increase or a decrease. Grasping this relationship is crucial for accurate financial record-keeping.

To navigate this intricate system, accountants often rely on a mnemonic device that encapsulates the core rules:

DEAD CLIC

This simple phrase breaks down the debit and credit effects for the primary account categories:

• Dividends (or Drawings): Increases are Debits.
• Expenses: Increases are Debits.
• Assets: Increases are Debits.
• Dividends (or Drawings): Decreases are Credits.
• Expenses: Decreases are Credits.
• Assets: Decreases are Credits.
• Credits: Increases are Credits.
• Liabilities: Increases are Credits.
• Income (Revenue): Increases are Credits.
• Capital (Equity): Increases are Credits.
• Credits: Decreases are Debits.
• Liabilities: Decreases are Debits.
• Income (Revenue): Decreases are Debits.
• Capital (Equity): Decreases are Debits.

Asset Account Transactions

Assets, representing the resources a company owns, are particularly illustrative when examining debit and credit mechanics. Understanding how these entries impact asset accounts provides a tangible grasp of the system.

Increases in asset accounts are always recorded as debits. This is because assets, by their nature, have a normal debit balance. Conversely, decreases in asset accounts are recorded as credits.

Transaction	Debit Account	Credit Account	Explanation
Company purchases equipment for cash.	Equipment (Asset)	Cash (Asset)	Equipment increases (debit), and Cash decreases (credit).
Company receives cash from a customer for services rendered.	Cash (Asset)	Service Revenue (Revenue)	Cash increases (debit), and Revenue increases (credit).
Company sells inventory on credit.	Accounts Receivable (Asset)	Sales Revenue (Revenue)	Accounts Receivable increases (debit), and Sales Revenue increases (credit).

Liability and Equity Account Decreases

While debits typically signal an increase in assets and expenses, credits are the architects of increases in liabilities, equity, and revenue. When it comes to decreasing these vital accounts, the roles of debits and credits are reversed.

Liability and equity accounts typically have normal credit balances. Therefore, an increase in a liability or equity account is recorded as a credit, and a decrease is recorded as a debit. This is where the “CLIC” part of the mnemonic truly shines.

• Decreasing Liabilities: If a company repays a loan, the Liability account (e.g., Loans Payable) is debited, and the Cash account (an Asset) is credited.
• Decreasing Equity: If a company declares and pays dividends to its shareholders, the Dividends account (a contra-equity account) is debited, and the Cash account is credited. Similarly, if a company buys back its own stock, Treasury Stock (a contra-equity account) is debited, and Cash is credited.
• Decreasing Revenue: While less common, if a company needs to record a sales return or allowance, Sales Revenue is debited, and Accounts Receivable or Cash is credited.

Depreciation Expense

Depreciation expense, a phantom cost that gnaws at the value of our tangible assets, is a crucial element in understanding a company’s true profitability. It’s the accounting acknowledgment that our machines, buildings, and vehicles, like dreams themselves, gradually lose their luster and utility over time. This systematic allocation of an asset’s cost over its useful life is not a cash outflow, but rather an expense that mirrors the wearing down of our investments.This expense, while not directly tied to a day-to-day transaction, plays a vital role in painting an accurate financial picture.

It ensures that the cost of using an asset is recognized in the periods it helps generate revenue, adhering to the matching principle that underpins sound accounting.

Classification as an Operating Expense

Depreciation expense is fundamentally classified as an operating expense. This means it is a cost incurred in the normal course of running a business, directly related to the generation of revenue from the company’s primary activities. Unlike financing costs or one-time gains and losses, depreciation is an ongoing charge that reflects the consumption of an asset’s economic benefit. It is part of the cost of doing business, just as much as salaries or rent.

Depreciation expense, a debit on the books, mirrors the relentless erosion of asset value, much like how reckless spending can lead to the question of can you cancel a credit card with a balance. Regardless of your financial entanglements, the fundamental accounting principle remains: depreciation is always a debit, a systematic reduction of an asset’s worth.

Depreciation Expense on the Income Statement

The income statement, that grand ledger of our financial performance, features depreciation expense as a distinct line item. It typically appears within the operating expenses section, often grouped with other selling, general, and administrative (SG&A) costs. Its placement here is deliberate, as it directly reduces operating income, offering a clearer view of the profitability derived from the core operations before considering interest and taxes.

Depreciation expense is a non-cash operating expense that reduces net income.

The presentation on the income statement serves to inform stakeholders about the cost of utilizing long-term assets in generating revenue. It’s a crucial component in calculating earnings before interest and taxes (EBIT), a key metric for assessing operational efficiency.

Balance Sheet Presentation of Accumulated Depreciation

On the balance sheet, depreciation expense itself is not directly presented. Instead, its cumulative effect over the life of an asset is reflected through a contra-asset account called “Accumulated Depreciation.” This account represents the total depreciation recognized for an asset up to a specific point in time.The typical balance sheet presentation involves listing the original cost of an asset, followed by the accumulated depreciation associated with it.

The difference between these two figures yields the asset’s book value, also known as its carrying value.

Asset Category	Original Cost	Accumulated Depreciation	Book Value
Machinery	$100,000	$40,000	$60,000
Buildings	$500,000	$150,000	$350,000

This presentation allows users of the financial statements to discern the original investment in an asset and the extent to which its value has been consumed through depreciation.

Contra-Asset Nature of Accumulated Depreciation

Accumulated depreciation is characterized as a contra-asset account. This means it possesses a normal credit balance, directly offsetting the normal debit balance of its related asset account. Its purpose is to reduce the carrying value of an asset on the balance sheet without directly altering the original cost recorded in the asset’s primary account.

Accumulated Depreciation is a contra-asset account that reduces the book value of an asset.

Think of it as a shadow that grows alongside the asset, mirroring its decline in utility. By using a contra-asset account, the original historical cost of the asset remains visible, providing valuable context for understanding the asset’s age and the total depreciation charged over its life. This transparency is vital for analytical purposes, allowing for comparisons and informed decision-making.

Recording Depreciation Expense

As the sands of time shift, so too does the value of our assets. This inevitable erosion, this gradual surrender of utility, is what accountants elegantly term depreciation. It’s not a physical depletion, but rather an accounting allocation, a way to match the cost of an asset with the revenue it helps generate over its useful life. To capture this fleeting essence of value, we must enter the realm of journal entries, where debits and credits dance in harmony to reflect the economic reality.Understanding how to record depreciation expense is crucial for painting an accurate picture of a company’s financial health.

It’s a process that bridges the tangible world of physical assets with the intangible world of financial statements, ensuring that our books whisper the truth about our resources. This is where the mechanics of accounting truly come alive, transforming abstract concepts into concrete financial records.

The Journal Entry Process for Recording Depreciation Expense, Is depreciation expense a debit or credit

Every financial transaction, no matter how subtle, leaves its mark on a company’s ledger. Recording depreciation expense involves a specific journal entry that acknowledges the asset’s diminished value and the expense incurred during the accounting period. This entry is fundamental to the double-entry bookkeeping system, ensuring that for every debit, there is a corresponding credit, maintaining the balance of the accounting equation.The standard journal entry for depreciation involves debiting Depreciation Expense and crediting Accumulated Depreciation.

Depreciation Expense is an account that appears on the income statement, reflecting the cost of the asset consumed during the period. Accumulated Depreciation, on the other hand, is a contra-asset account on the balance sheet. It represents the total depreciation taken on an asset since its acquisition, effectively reducing the asset’s book value without directly reducing the original cost recorded in the asset account.

This distinction is vital; we never debit the asset account itself for depreciation.

Sample Journal Entry to Record Monthly Depreciation

Imagine a company has a piece of machinery with a monthly depreciation expense of $

To record this in the books for the month of January, the journal entry would look as follows:

Date	Account	Debit	Credit
Jan 31	Depreciation Expense	$500
	Accumulated Depreciation – Machinery		$500
	To record monthly depreciation expense.

This entry clearly illustrates the flow of accounting information. The debit to Depreciation Expense increases the expense for the period, thereby reducing net income. The credit to Accumulated Depreciation increases this contra-asset account, signaling that the machinery is now worth $500 less in terms of its depreciated value.

Impact of Recording Depreciation Expense on the Income Statement and Balance Sheet

The act of recording depreciation expense sends ripples through both the income statement and the balance sheet, each telling a part of the story of an asset’s journey. It’s a delicate balancing act, ensuring that the financial statements reflect a true and fair view of the company’s performance and position.On the income statement, the debit to Depreciation Expense increases operating expenses.

This, in turn, reduces the company’s net income for the period. This reduction in net income is a direct consequence of recognizing that a portion of the asset’s economic benefit has been “used up” during that period. It’s an accrual concept at play, matching expenses with the revenues they help to generate.On the balance sheet, the credit to Accumulated Depreciation increases this contra-asset account.

Since Accumulated Depreciation is paired with the related asset account (e.g., Machinery), the net book value of that asset decreases. The net book value is calculated as the original cost of the asset minus its accumulated depreciation. This reflects the asset’s reduced carrying value on the company’s books, moving closer to its salvage value over time.

Step-by-Step Procedure for Calculating and Recording Depreciation

The process of depreciation, from calculation to recording, is a systematic endeavor. Following these steps ensures accuracy and consistency in financial reporting, allowing for reliable comparisons over time and across different entities.To properly calculate and record depreciation, a structured approach is essential:

1. Determine the Asset’s Cost: This includes the purchase price and any costs necessary to get the asset ready for its intended use, such as shipping and installation fees.
2. Estimate the Useful Life: This is the period over which the asset is expected to be used by the company. It’s an estimate, often based on industry standards, company experience, or manufacturer recommendations.
3. Estimate the Salvage Value: This is the estimated residual value of the asset at the end of its useful life. It’s the amount the company expects to sell the asset for or its scrap value.
4. Choose a Depreciation Method: Common methods include straight-line, declining-balance, and units-of-production. The chosen method should best reflect the pattern in which the asset’s economic benefits are expected to be consumed. For instance, the straight-line method assumes an even distribution of benefits.
5. Calculate Periodic Depreciation: Using the chosen method, calculate the depreciation expense for the current accounting period (e.g., monthly, quarterly, annually). For the straight-line method, the formula is:
   

   Depreciation Expense = (Cost – Salvage Value) / Useful Life

6. Prepare the Journal Entry: Once the periodic depreciation is calculated, create the journal entry. Debit Depreciation Expense for the calculated amount and credit Accumulated Depreciation for the same amount.
7. Post to the Ledger: Transfer the debit and credit amounts from the journal entry to the respective accounts in the general ledger.
8. Update Financial Statements: Ensure the Depreciation Expense is reflected on the income statement and the Accumulated Depreciation is updated on the balance sheet, thereby adjusting the asset’s net book value.

Impact of Depreciation Expense on Financial Statements

Depreciation, though a non-cash expense, casts a long shadow across a company’s financial landscape, subtly altering the very numbers that tell its story. Understanding this impact is akin to deciphering a hidden language within the financial statements, revealing the true cost of an asset’s service over time and its effect on profitability and asset valuation.This section will illuminate how the phantom hand of depreciation touches the Income Statement and the Balance Sheet, transforming reported figures and influencing perceptions of a company’s financial health.

We will delve into the specifics of its influence on net income, the total value of assets, and the crucial concept of book value.

Depreciation Expense Effect on Net Income

Depreciation expense, as a cost incurred in the process of generating revenue, directly reduces a company’s profitability. It is an operating expense that is recognized on the income statement, mirroring the gradual wear and tear or obsolescence of an asset. By increasing total expenses, depreciation consequently decreases the company’s net income, often referred to as the “bottom line.” This reduction in net income can have ripple effects, influencing metrics such as earnings per share (EPS) and the company’s tax liability, as taxable income is also lowered.

Depreciation Expense Effect on Total Assets

While depreciation expense reduces net income on the income statement, its impact on the balance sheet is seen through the contra-asset account, Accumulated Depreciation. Accumulated depreciation represents the total depreciation recognized for an asset since it was acquired. As depreciation expense is recorded each period, it increases the balance of accumulated depreciation. This growing contra-asset account directly reduces the net book value of the related fixed assets, thereby lowering the total reported value of assets on the balance sheet.

Accumulated Depreciation Reducing Asset Book Value

The book value of an asset is its original cost minus its accumulated depreciation. Accumulated depreciation is a cumulative account, meaning it aggregates the depreciation expense recognized over the asset’s useful life. Each time depreciation is recorded, the accumulated depreciation balance grows, effectively “eating away” at the asset’s original cost. This systematic reduction reflects the asset’s diminishing economic usefulness and its gradual conversion into expense.

Book Value = Original Cost – Accumulated Depreciation

Scenario Illustrating Financial Statement Impact

Imagine “Stellar Innovations Inc.” purchases a new piece of manufacturing equipment for $100,000. They estimate its useful life to be 5 years, with no salvage value. Using the straight-line depreciation method, their annual depreciation expense will be $20,000 ($100,000 cost / 5 years).Let’s examine the impact at the end of the first year:* Income Statement: Stellar Innovations will record $20,000 in depreciation expense.

This will reduce their operating income by $20,000, and consequently, their net income will be $20,000 lower than it would have been without this expense. If their income before depreciation was $100,000, their net income would now be $80,000 (assuming no taxes for simplicity).* Balance Sheet:

The original cost of the equipment remains $100,000.

Accumulated Depreciation will increase to $20,000.

The net book value of the equipment will be $80,000 ($100,000 cost – $20,000 accumulated depreciation).

Total assets on the balance sheet will be $20,000 lower than they would have been if the asset’s full cost was still reported.

This single year of depreciation has reduced both profitability and the reported value of the company’s assets, a testament to its pervasive influence on financial reporting.

Illustrative Scenarios and Examples: Is Depreciation Expense A Debit Or Credit

To truly grasp the essence of depreciation, let us paint a picture with vibrant strokes, illustrating its journey through the ledger and its tangible impact on the financial narrative. We will venture into the realm of tangible assets, observing how their value gracefully diminishes over time, and how this ebb and flow is meticulously recorded.Through a series of carefully crafted scenarios, we will witness depreciation in action, demystifying the seemingly abstract concept into concrete accounting entries.

This exploration will illuminate the practical application of depreciation principles, offering clarity and a deeper understanding of its role in financial reporting.

Depreciation Expense Entries for Various Asset Types

Different assets, born from the ingenuity of human hands or the bounty of nature, possess unique characteristics that influence their depreciation. From the robust hum of machinery to the swift motion of vehicles, each asset embarks on its own depreciation odyssey. Understanding these nuances allows for precise financial reflection.Consider a manufacturing company acquiring a state-of-the-art piece of machinery. Its purpose is to churn out goods, a function that will inevitably wear it down over time.

The journal entry to record its depreciation would reflect this gradual consumption of its economic benefit.

Debit: Depreciation Expense (reflecting the cost allocated to the current period)Credit: Accumulated Depreciation (a contra-asset account that accumulates the total depreciation charged to date)

Similarly, a delivery company investing in a fleet of vans will see these vehicles depreciate as they navigate city streets and highways. The depreciation expense recognized for these vehicles will mirror the wear and tear they endure, impacting their book value over their operational lifespan.The recording process remains consistent: the expense is recognized in the period it is incurred, and the accumulated depreciation account grows, mirroring the total depreciation charged against the asset since its acquisition.

This systematic approach ensures that the financial statements accurately represent the declining value of these essential operational tools.

Depreciation Impact Over an Asset’s Useful Life

The true story of depreciation unfolds not in a single entry, but in the cumulative effect over the asset’s entire useful life. Each period, a portion of the asset’s cost is expensed, and the accumulated depreciation balance swells, mirroring the asset’s diminishing utility. This progression is crucial for understanding an asset’s book value at any given point.The following table vividly illustrates this progressive impact for a hypothetical piece of machinery.

Period	Debit Account	Credit Account	Impact on Net Income	Impact on Total Assets	Book Value
Year 1	Depreciation Expense	Accumulated Depreciation	Decrease	Decrease	Original Cost – Year 1 Depreciation
Year 2	Depreciation Expense	Accumulated Depreciation	Decrease	Decrease	Original Cost – (Year 1 Depreciation + Year 2 Depreciation)
Year 3	Depreciation Expense	Accumulated Depreciation	Decrease	Decrease	Original Cost – (Total Depreciation to Date)
…	…	…	…	…	…
End of Useful Life	Depreciation Expense	Accumulated Depreciation	Decrease	Decrease	Salvage Value

This table demonstrates that with each recording of depreciation, net income is reduced, and the total assets are also reduced. By the end of the asset’s useful life, the accumulated depreciation will equal the asset’s depreciable cost (original cost minus salvage value), and its book value will reflect its estimated salvage value.

Consequences of Incorrect Depreciation Recording

The meticulous nature of accounting demands precision. An error in recording depreciation, however unintentional, can cast a long shadow, distorting the financial landscape and potentially misleading stakeholders. Such missteps can lead to an overstatement or understatement of both profitability and asset values.Imagine a scenario where a company mistakenly omits the recording of depreciation expense for a significant piece of equipment for an entire fiscal year.

This oversight would result in an artificially inflated net income for that period, as an expense that should have been recognized was not. Consequently, taxes payable might be miscalculated, and investors might be presented with an overly optimistic view of the company’s performance.Furthermore, the balance sheet would also be inaccurate. The asset’s book value would be higher than it should be, reflecting the unrecorded depreciation.

This misrepresentation could impact loan covenants, valuation assessments, and the overall trust placed in the company’s financial reporting. Rectifying such an error would involve a prior period adjustment, often necessitating restatements of financial statements, which can be a complex and costly process.

Flow of Depreciation Expense to Financial Statements

The journey of depreciation expense from its initial recording to its ultimate appearance on the financial statements is a fundamental accounting flow. It begins with the identification of the expense and culminates in its impact on both the income statement and the balance sheet, providing a clear picture of asset utilization and financial health.The process can be visualized as follows:

1. Journal Entry

The initial recording of depreciation involves a debit to Depreciation Expense and a credit to Accumulated Depreciation.

2. General Ledger

These journal entries are then posted to the respective accounts in the general ledger, accumulating the total depreciation expense for the period and the total accumulated depreciation for the asset.

3. Trial Balance

Before financial statements are prepared, a trial balance is generated, listing all account balances. The Depreciation Expense account balance will be included here.

4. Income Statement

The Depreciation Expense, as it appears on the trial balance, is transferred to the income statement. As an operating expense, it reduces the company’s net income.

5. Balance Sheet

The Accumulated Depreciation account, a contra-asset account, is presented on the balance sheet. It is subtracted from the asset’s original cost to arrive at the asset’s net book value.This structured flow ensures that the economic reality of asset wear and tear is consistently and accurately reflected in the company’s financial reports, providing essential insights for decision-making.

Closing Summary

Ultimately, the journey through depreciation expense, whether it’s a debit or credit, reveals a fundamental truth: meticulous record-keeping and a firm grasp of accounting principles are indispensable for accurate financial representation. The consistent application of these rules ensures that financial statements not only comply with regulations but also provide a true and fair view of an entity’s financial health, allowing for informed decision-making and strategic planning.

FAQ Guide

What is the primary purpose of depreciation?

The primary purpose of depreciation is to allocate the cost of a tangible asset over its estimated useful life, reflecting its gradual decline in value and matching expenses with the revenues they help generate.

How does recording depreciation impact the accounting equation?

Recording depreciation increases expenses, which reduces equity. Simultaneously, it increases accumulated depreciation, a contra-asset account, which reduces total assets. Thus, the accounting equation remains balanced (Assets decrease, Equity decreases).

What is the significance of accumulated depreciation?

Accumulated depreciation represents the total depreciation expense recognized for an asset since it was placed in service. It is a contra-asset account that reduces the book value of the related asset on the balance sheet.

Can depreciation be recorded on intangible assets?

No, depreciation is specifically for tangible assets. The systematic allocation of the cost of intangible assets over their useful lives is referred to as amortization.

What happens if depreciation is not recorded?

If depreciation is not recorded, a company’s net income will be overstated, and its total assets (and equity) will be overstated on the balance sheet, leading to inaccurate financial reporting.