Where is depreciation expense shown?

• A. Balance Sheet
• B. Income Statement
• C. Cash Flow Statement
• D. Statement of Changes in Equity

Answer: (B)

Depreciation expense is recorded on the income statement as an operating expense, reflecting the allocation of the asset’s cost over its useful life. This expense reduces the period’s net income, even though no cash leaves the company at that moment.

Keep in mind the cash flow and balance sheet implications: because depreciation is non-cash, the cash flow statement adds it back to net income when calculating cash from operations (in the indirect method). On the balance sheet, depreciation shows up as accumulated depreciation, a contra-asset that reduces the book value of fixed assets. Its effect on equity comes through its impact on net income and retained earnings, not as a separate line item.