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 is the relationship between accumulated depreciation and depreciation expense?

    Understand the relationship between accumulated depreciation and depreciation expense. Learn how each one is accounted for ...
  2. 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 ...
  3. Why does accumulated depreciation have a credit balance on the balance sheet?

    Wonder why accumulated depreciation is a credit account, despite residing on the asset side of the balance sheet? Why not ...
  4. How does accumulated depreciation affect net income?

    Learn why accumulated depreciation does not directly affect a company's net income; understand where a company accounts for ...
  5. 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 ...
  6. 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 ...
RELATED TERMS
  1. Accumulated Depreciation

    The cumulative depreciation of an asset up to a single point ...
  2. Depreciation

    1. A method of allocating the cost of a tangible asset over its ...
  3. Retirement Method of Depreciation

    An accounting procedure in which an asset is expensed for depreciation ...
  4. Depreciable Property

    Any type of asset that is eligible for depreciation treatment. ...
  5. Accelerated Depreciation

    Any method of depreciation used for accounting or income tax ...
  6. Fully Depreciated Asset

    A property, plant, or piece of equipment which, for accounting ...
Hot Definitions
  1. Put Option

    An option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying security ...
  2. Frexit

    Frexit – short for "French exit" – is a French spinoff of the term Brexit, which emerged when the United Kingdom voted to ...
  3. AAA

    The highest possible rating assigned to the bonds of an issuer by credit rating agencies. An issuer that is rated AAA has ...
  4. GBP

    The abbreviation for the British pound sterling, the official currency of the United Kingdom, the British Overseas Territories ...
  5. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  6. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
Trading Center