What is accumulated depreciation and how does it affect the financial statements?

• A. It is a cash reserve set aside; increases cash flow.
• B. It is the total depreciation expense recorded against a fixed asset; reduces asset's book value on the balance sheet; does not affect cash.
• C. It is the current period depreciation only; increases net income.
• D. It is a contra-liability; reduces liabilities.

Answer: (B)

Accumulated depreciation is the total amount of depreciation charged against a fixed asset since it was purchased. It is a contra-asset account, so it reduces the asset’s carrying value on the balance sheet (net book value equals cost minus accumulated depreciation). It doesn’t involve cash in the period it’s recorded because depreciation is a non-cash expense. On the income statement, the depreciation expense reduces net income for the period. In the cash flow statement, depreciation is added back to net income because it did not use cash, reflecting its non-cash nature. It can also lower taxable income, affecting taxes.