Question

How does depreciation effect basic accounting equation

• A. Leads to decreases in assets and shareholders equity
• B. Leads to decrease in assets only
• C. Leads to increase in liability and decrease in assets
• D. Leads to decrease in shareholders equity

Answer 1

The correct option is A Leads to decreases in assets and shareholders equity

Depreciation is an expense on the income statement it effects shareholders' equity through net income which can impact the assets.
The higher the depreciation implies the lower the net income and assets, thus lower owners' equity.
Depreciation leads to increase in the assets and the shareholder's equity.