Question of the Week

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.


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.

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