The charge of depreciation directly reduces the ____________?
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Answer: D. Capital
Explanation
Depreciation expense reduces net income, which ultimately decreases owner's equity or capital. At period-end, expense accounts are closed into retained earnings or capital accounts. Consequently, recording depreciation lowers the overall net worth of the business. Depreciation is a non-cash expense that decreases the book value of fixed assets. Simultaneously, it flows through the income statement to reduce operating profit. Lower net income translates directly into reduced retained earnings and capital.
Understanding how depreciation affects capital helps business owners track equity erosion over time. Even though no physical cash leaves the business, book value and capital decline. This mechanism preserves accurate accounting records for company valuation. Liabilities remain unaffected by depreciation because it involves asset reduction and expense recognition. Cash and bank balances do not change because depreciation is a non-cash accounting allocation. Therefore, capital is the ultimate equity account reduced by depreciation.
- Subject
- Accounting and Finance
- Category
- Accounting
- Topic
- —
- Difficulty
- medium
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