Which statement best describes how non-cash adjustments should be reflected when linking the Balance Sheet?

Which statement best describes how non-cash adjustments should be reflected when linking the Balance Sheet?

• A. Depreciation is subtracted from the Asset side and added to the Liabilities and Equity side (Retained Earnings).
• B. Depreciation is added to the Asset side.
• C. Depreciation has no balance sheet effect.
• D. Depreciation increases cash.

Answer: (A)

Non-cash adjustments like depreciation show up on the Balance Sheet by reducing the value of assets and lowering shareholders’ equity, not by moving cash. Depreciation decreases the asset’s carrying amount (via accumulated depreciation), and because it reduces net income, it also reduces retained earnings, which is part of Liabilities and Equity. So when you link the income statement to the balance sheet, you reflect depreciation by subtracting from the asset side and showing a lower figure on the Liabilities and Equity side (retained earnings). Cash is unaffected since depreciation is a non-cash expense. This is why the option describing a deduction on the asset side and an adjustment in retained earnings on the equity side best fits how non-cash adjustments should be reflected. The other statements are inconsistent with how depreciation actually impacts the balance sheet.

Non-cash adjustments like depreciation show up on the Balance Sheet by reducing the value of assets and lowering shareholders’ equity, not by moving cash. Depreciation decreases the asset’s carrying amount (via accumulated depreciation), and because it reduces net income, it also reduces retained earnings, which is part of Liabilities and Equity. So when you link the income statement to the balance sheet, you reflect depreciation by subtracting from the asset side and showing a lower figure on the Liabilities and Equity side (retained earnings). Cash is unaffected since depreciation is a non-cash expense. This is why the option describing a deduction on the asset side and an adjustment in retained earnings on the equity side best fits how non-cash adjustments should be reflected. The other statements are inconsistent with how depreciation actually impacts the balance sheet.