Question

The depreciation account is increased (debited) for the amount of depreciation. However, the fixed asset account is not decreased (credited). This is because both the original cost of a fixed asset and the depreciation recorded since its purchase are reported on the balance sheet. Instead, an account entitled ________________________________________ is increased (credited)

Answer 1

In accounting, the Increase in depreciation is recorded in the Accumulated Depreciation account, a contra asset account used to reflect the reduced value of assets over time. T-accounts help visualize the relationships between assets, liabilities, and net worth, where total assets always match the sum of liabilities and net worth.

Step-by-step explanation:

When calculating depreciation, the Accumulated Depreciation account is increased (credited) while the fixed asset account remains unaltered to indicate the original cost of the asset. Unlike reducing the fixed asset account directly, the Accumulated Depreciation is recorded in a contra asset account, which is deducted from the total fixed assets, reflecting the asset's net book value on the balance sheet.

The use of T-accounts simplifies the understanding of how transactions affect the balance of an account. On the left side of the T-account, assets are listed, whereas the right side contains liabilities and equity (or net worth for a bank) which also includes the Accumulated Depreciation. A healthy organization will show a positive net worth, while a bankrupt firm will have a negative one. The key to remember is that the total assets always equal the sum of liabilities plus net worth.