Q:
You are analyzing a small company's financials, and notice that the bookkeeper made the following entry:
Depreciation Expense 300  
Automobile asset   300

Which is correct?
1. The entry is correct, but the asset should be a debit.
2. The entry is incorrect because the asset's value won't be tracked.
3. The entry is correct because the asset was disposed of.
4. The entry is incorrect because depreciation should be a credit.

A:

The best answer is 2. 1 is tempting, but wrong, because an asset "sounds like" a debit but the depreciation expense here should be an accumulating credit. 3 could be partly true, but the intent here is to record depreciation, not dispose of an asset. 4 is partly true, but 2 is better because the correct answer is:

Depreciation Expense 300  
Automobile asset   300

Which shows an account exists ("accumulated") to track book value of the asset as it changes over time.

Have a Financial Question?

RELATED FAQS

  1. What happens to accumulated depreciation when you sell an asset?

    Learn what happens to a company's accumulated depreciation when it sells an asset. Understand why accumulated depreciation ...
  2. What would cause a decrease in accumulated depreciation?

    Understand what causes a decrease in a company's accumulated depreciation. Learn why a company's accumulated depreciation ...
  3. When should I use depreciation expense instead of accumulated depreciation?

    Distinguish differences between depreciation expense, which is reported on the income statement, and accumulated depreciation ...
  4. Is depreciation only used for tangible assets?

    Learn if tangible assets can be depreciated, as well as what other assets are eligible for depreciation so you can account ...
  5. How is depreciation related to the carrying value of a tangible asset?

    Understand how depreciation is related to the carrying value of a company's tangible asset. Learn how accumulated depreciation ...
  6. What is the tax impact of calculating depreciation?

    Understand the tax implications of a company's depreciation. Learn how differences in accounting methods change the amount ...
RELATED TERMS
  1. Accumulated Depreciation

    The cumulative depreciation of an asset up to a single point ...
  2. Fully Depreciated Asset

    A property, plant, or piece of equipment which, for accounting ...
  3. Depreciated Cost

    1. The value of an asset net of all accumulated depreciation ...
  4. Debit

    An accounting entry that results in either an increase in assets ...
  5. Annuity Method Of Depreciation

    A method of depreciation centered around cost recovery and a ...
  6. Accelerated Depreciation

    Any method of depreciation used for accounting or income tax ...
Hot Definitions
  1. Goldilocks Economy

    An economy that is not so hot that it causes inflation, and not so cold that it causes a recession. This term is used to ...
  2. White Squire

    Very similar to a "white knight", but instead of purchasing a majority interest, the squire purchases a lesser interest in ...
  3. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  4. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  5. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  6. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
Trading Center