Final answer:
Depreciation expense reflects the cost allocation of an asset over a period and affects the calculation of NNP. After calculating it, the expense appears on the income statement, reducing taxable income, and the accumulated depreciation adjusts the asset's book value on the balance sheet.
Step-by-step explanation:
Once the estimated depreciation expense for an asset is calculated, it reflects the amount of the asset's cost that has been allocated as an expense over a specific period, usually a year. This concept is integral to accounting practices as it impacts the calculation of the Net National Product (NNP).
The NNP is derived by taking the Gross National Product (GNP) and subtracting the value of the physical capital that has worn out or depreciated over that same period. Depreciation is the systematic allocation of the cost of a physical asset over its expected useful life. The purpose of this is to match the expense of the asset with the revenue it generates.
After estimating depreciation, companies can report this expense on their income statements, resulting in a reduced taxable income. The total accumulated depreciation is also reported on the company's balance sheet as a deduction from the asset's historical cost to reflect its current book value. Over time, as more depreciation accumulates, the book value of the asset decreases until it reaches the end of its useful life or its salvage value.